Fina 431 0003

HONORING THE MEMORY OF PROFESSOR ROLAND PORTAIT
A collective work by Patrice Poncet, Patricia Charléty, Bernard Dumas, Isabelle

Bajeux-Besnainou, Benjamin Croitoru
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2022/1 Vol. 43 | pages 3 à 45

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Honoring the Memory
of Professor Roland Portait
A collective work by Patrice Poncet, Patricia Charléty,
Bernard Dumas, Isabelle Bajeux-Besnainou and Benjamin Croitoru
As a tribute to our colleague Roland Portait, Finance has decided to

dedicate this special issue in his memory. Professor Portait has served for
many years as the co-editor of Finance, and he has been instrumental to
the development of the journal. This article is a collection of personal
testimonies reflecting on Roland Portait’s career and contribution to our
field. It is followed by research articles that were selected from a call for
papers, released last year, on the topic of portfolio optimization – an area
of research to which Professor Portait significantly contributed. Some of
these articles will also appear in the next issue of Finance.
Carole Bernard, Pascal François, and Christophe Godlewski.
I. Tribute to Roland Portait (1943-2021) 5
I. Tribute to Roland Portait (1943-2021)

by Patrice Poncet, Distinguished Professor of Finance,
ESSEC Business School
It is with great sadness that we acknowledge the sudden and untimely
passing away of Professor Roland Portait on March 18, 2021, following
a lightning illness. Roland was Professor of Finance at ESSEC from 1973
to 2010 and Professor of Finance at CNAM (Conservatoire National des
Arts et Métiers) from 1990 to 2010. He was Emeritus Professor at ESSEC
since 2011. As a very long time friend, co-author and colleague, it is both
my privilege and sorrow to write this tribute.
Roland held a Bachelor’s degree in Mathematics, was a graduate engineer
from Sup-Télécom, and a graduate of the Institut d’Etudes Politiques de
Paris. He obtained his PhD in Finance from the Wharton School of the
University of Pennsylvania. He co-founded the Finance Department at
ESSEC in 1973 with Florin Aftalion and me. He was elected Dean of the
ESSEC Faculty in the late 1980s.
His qualities as a researcher and his recognized scientific rigor allowed
him to publish numerous articles, some of which were published in top
international economics and finance journals (see References below). He
was also an appreciated and dynamic co-editor of this Revue in the 1990s
and contributed strongly to its international development and notoriety.
His pronounced taste for pedagogy and knowledge transmission led him
to write six specialized finance books, at least two of which have become
basic references in market and corporate finance. The range of his skills
was broad. An outstanding researcher and shrewd teacher, he was also a
consultant to many banks and financial institutions, participated in the
creation of MATIF (Marché à Terme des Instruments Financiers) in Paris
in 1986, and was a member of the Scientific Council of the COB (later the
AMF, Autorité des Marchés Financiers) for several years. He was also, and
simultaneously, a wise and efficient senior manager (Les Cachous Lajaunie)
until the year 2000.
Those who knew Roland as a friend or simply as a colleague loved him
also for his human qualities. He was very sharp but not condescending, warm
but not overly so, with an unfailing sense of humor but not provocative,
6 Finance Vol. 43 N° 1 2022
cheerful but not boisterous, and he was, in addition to his teaching skills
without exhausting them, a wonderful narrator of stories, of implausible
but true and hilarious anecdotes about himself, and of History of which he
was an enthusiast and, for some countries and time periods (e.g., Spain, his
mother’s country), almost an expert. His dedication to his students and to
the institutions he served was exemplary.
I will articulate my relatively brief (and therefore unable to do full justice
to his intellectual influence) discussion of Roland’s contributions in two
parts, distinguishing his early works, mostly in French (up to roughly 1990,
except for some books) and covering a wide variety of subjects from his
later research (mostly in English, except his books) more focused on asset
pricing and portfolio theory and management. With one exception, all his
publications were with one or two co-authors, and the list of these is quite
long, so broad was the range of his intellectual interests.1
1. Early work
Roland’s first publications were on corporate finance. Poncet and Portait
(1978), hereafter PP, show that the whole theory of optimal corporate
investment and capital structure and the firm’s value in perfect markets
(the Modigliani-Miller theorems) recover very simply from the accounting
equality, for any time period, between the sum of the free cash flow and
the possible tax shelter and the sum of flows paid off to (or received from)
shareholders and bondholders. In PP (1979, 1981) they show in what
sense unanticipated inflation, more that the inflation level per se, impinges
negatively on the firm’s value (through the real value of investment projects)
and more generally on economic agents’ total wealth. Roland’s interest
for corporate finance culminated with his book (Portait and Noubel, first
edition 1988, fourth edition 1998) which remained a standard for a long
time and was adapted and extended later on with two new authors (Portait,
Charlety-Lepers, Dubois and Noubel (2004)).
His second main theme was macroeconomics. In addition to PP (1979),
his book on macro finance, PP (1980), put in perspective in a paper by
Dumas in Finance’s present issue, grounded macro-models on the real and
1 For clarity, I have listed referenced papers, books, and book chapters in three distinct categories.
financial decisions of micro agents in a rigorous way, insisted on the role

of banking and finance and was also a standard for many years.
Roland also worked extensively on banks and the banking system, a theme
already present in the previous book. In a series of three papers, Portait and
Demians d’Archimbaud (1989a, 1989b, 1993) studied banks’ asset-liability
management and the impact of both (the then new) securitization process
and more stringent regulation (Cooke ratios) on banks’ cost of equity and
money creation. Related to that topic, in two issues of Finance, PP (1982)
analyze the impact of interest rate volatility on a growing bank’s credit
assets, and PP (1983) propose an extended model of the French banking
system in which a (systemic) institution peculiar to France, the Caisse des
Dépôts et Consignations, controlled by the French monetary authorities
and government, plays a special and important role as a thrift institution
and a transmission mechanism of monetary policy.
This led naturally Roland to study the term structure of interest rates and
interest rate risk per se. Two papers, Portait, Demians d’Archimbaud and
Geman (1990) and Geman, Demians d’Archimbaud and Portait (1990),
propose a general analysis of interest rate risk using stochastic models then
largely unknown in Europe.
As new derivatives markets unfolded in France, MATIF (Futures on
interest rates) in February 1986 and MONEP (options on stocks then on
the CAC40 stock index) in September 1987, Roland was also one of the
first French researchers to publish in this area. The booklet on the MATIF
(Poncet, Portait and Jacquillat, 1986), which proposed a rigorous financial
treatment of the contract on a notional bond in both theory and practice
(in particular for hedging purposes), was instrumental in the education of
French traders. PP (1986, 1987) offered a detailed analysis of optimal or
maximal hedging debt portfolios with futures contracts written on long-
and short-term bonds or interest rates, with and without taking account
of fiscal aspects, and the impact of these contracts on equilibrium asset
prices. Portait and Allemane (1989) showed how to value, optimize and
manage a portfolio of long- and medium-term bonds including futures
and options on interest rates. Finally, Bito, Poncet and Portait (1987a,
1987b) adapted static arbitrage strategies to the (then) specificities of French
option contracts and proposed (then) new dynamic option strategies for
investment and hedging.
8 Finance Vol. 43 N° 1 2022
2. Later work
This work may be broadly divided in four parts: portfolio insurance,

asset pricing, quantitative or mathematical finance, and portfolio theory
and management.
Portfolio insurance was a very popular technique initiated by Leland and
Rubinstein in 1976. It was analyzed in detail by Aftalion and Portait (1988).
Its growth was spectacular until it was held partly responsible for the stock
market crash of 1987. Its limits then were recognized and remedied by a
number of extensions and sophistications, partly reported and analyzed in
PP (1997). The two papers by Charlety-Lepers and Portait (1994, 1997)
studied the impact of these strategies (both Option Based Portfolio Insurance
and Constant Proportion Portfolio Insurance) on stock price volatility and
stock market stability. They concluded that, if Portfolio Insurance increases
stock price volatility, it is not responsible per se of the extreme price varia-
tions observed during crashes, unless imperfect information leads to strongly
erroneous assessment of the origin of price movements.
Bajeux-Besnainou and Portait, hereafter BP, published four papers
on asset pricing. In BP (1992), they provide a literature review on valu-
ation models in which asset returns do not follow general Itô processes
but merely processes whose parameters depend on state variables obeying
a multi-dimensional diffusion process. Asset prices obtain by applying
the Feynman-Kaç theorem to the partial differential equation driving the
dynamics of these prices. The same idea prevails in BP (1998) where stock
and bond derivatives are valued within a multi-factor Gaussian framework.
In BP (1997, 2002), they make extensive use of the remarkable properties
of the numeraire (or optimal growth) portfolio (the portfolio which, when
used as numeraire, makes the prices of all risky assets martingales under the
historical probability) introduced by J.B. Long. In BP (1997) they prove
that the numeraire portfolio is instantaneous mean-variance efficient and
show how to recover easily the main results of financial theory regarding
the CAPM, CCAPM, APT and contingent claim pricing (à la Merton) in
complete markets. In BP (2002) they extend the analysis to the pricing of
contingent claims under incomplete markets.
Roland’s work on quantitative or mathematical finance was pedagogical
and written in French. He started with Portait (1991), arguably the first
paper published in French by a non-mathematician explaining stochastic
processes applied to the valuation of financial asset prices, as a chapter in

a book devoted to the essentials of Management. Then, Poncet, Portait
and Hayat (1996, first edition 1993) published a textbook on financial
mathematics focused on asset pricing (stocks, bonds, foreign exchange and
derivatives) and risk analysis. Finally, Portait and Poncet (fourth edition
2014, first edition 2008) is a comprehensive textbook on market finance
(covering primitive assets, derivatives, portfolio theory and management,
and credit risk analysis and management) and a reference book in French-
speaking countries. The long-awaited (by Roland’s fans) English translation,
adaptation and update of this book is under completion and to be published
in the near future by a major international publisher.
Roland’s last field of investigation, and probably his favorite, was
portfolio theory and management. In an early start, PP (1993) examined
portfolio decisions involving both fixed and non-fixed income securities
under stochastic interest rates. Two state variables, the short-term and the
long-term rates, fully determine the bonds prices and partly influence the
other assets prices. The authors proposed a methodology for determining
optimal portfolios in such a context and then used it to solve the portfolio
problem of investors whose long-term bond holdings are constrained,
which generates undesirable interest rate risk that is hedged with futures
contracts.
After a short book on portfolio theory, Aftalion, Poncet and Portait
(1998), to be followed later on by a book chapter by PP (2010) on the same
subject, Roland co-authored an important paper, BP (1998), on dynamic
asset allocation in which the authors analyze the portfolio strategies that are
mean-variance efficient when continuous rebalancing is allowed. Under very
general assumptions, with a continuum of zero-coupon bonds of different
maturities, they showed that the dynamic efficient frontier is a straight
line and that every dynamic mean-variance efficient strategy is a ‘buy and
hold’ combination of two funds: the zero-coupon bond of appropriate
maturity and a continuously rebalanced portfolio. They derived the explicit
dynamic strategy defining the latter for two particular price processes and
compared the static and dynamic efficient frontiers in these cases. In a book
chapter, BP (2002b), they extended this comparison to other situations
and discussed the validity of separation theorems under both the static and
dynamic assumptions. The subsequent paper, BP (1999), written in French,
was a review of the (then) new dynamic models designed to optimize the
investor’s strategic asset allocation.
10 Finance Vol. 43 N° 1 2022
In a sequel to the BP (1998) paper, BP (2002a) analyzed dynamically

efficient portfolios when interest rates are stochastic and obey an Ornstein-
Uhlenbeck process and stock prices follow processes that depend on and
are correlated with interest rates, which makes the framework suitable to
the study of dynamic portfolios comprising stocks, bonds and monetary
assets. Another sequel is the paper by Nguyen and Portait (2002) where,
in a mean-variance set up, the authors analyzed the investors’ optimal
dynamic asset allocation when they face a solvency constraint, i.e., wealth
positiveness at all points of time. Under general assumptions and with asset
prices obeying Itô processes, the efficient strategies are identified as synthetic
put options on the particular inefficient portfolio yielding the return with
minimal second moment.
According to basic financial theory, the proportion of risky assets in the
risky part of investors’ portfolios does not depend on their risk aversion
since they all hold the same risky mutual fund. Risk aversion affects only
the allocation between the riskless asset and the mutual fund (two-fund
separation theorem). However, popular investment advice has it that the
bond/stock ratio should vary directly with risk aversion, which leads to
the so-called asset allocation puzzle. Bajeux-Besnainou, Jordan and Portait
(2001, 2003) were the first to provide theoretical support for the popular
advice based on the two insights that the investor’s horizon usually exceeds
the maturity of the cash asset and that the investor adopts a dynamic, rather
than a buy-and-hold, strategy. In that case, cash is no longer the riskless
asset. Assuming that the investor can replicate a riskless zero-coupon bond
maturing at the investment horizon by combining a bond fund and cash,
bonds will be present in both the synthetic riskless asset and the risky
mutual fund, and the theoretical bond/stock ratio will vary directly with
risk aversion for any Hyperbolic Absolute Risk Aversion investor. In addi-
tion, the authors’ simple characterization provided insights about investors’
behavior over time and justified the rational use of convex versus concave
portfolio strategies.
Finally, Bajeux-Besnainou, Belhaj, Maillard and Portait (2011) and
Bajeux-Besnainou, Portait and Tergny (2013) studied common strategies
used by portfolio managers adopting a benchmark-linked management
under the constraint of a maximum tracking error and possibly weight
constraints. The first paper addressed the problem of an active portfolio
manager whose performance is assessed against a benchmark within a
tracking error range and who must comply with weights constraints due
to their own commitment to their clients. The authors characterized the

optimal asset allocation which depends on the targeted ex ante tracking
error and on the weight constraints and analyzed the implications of the
weight constraints on the manager’s performance and on the relevance of
performance measures such as the Information Ratio. The second paper
studied the optimization of the tracking error/return trade-off. The authors
assumed that the manager maximizes the Information Ratio and complies
with a stochastic hedging constraint whereby the terminal value of the
portfolio is (almost surely) higher than a given stochastic payoff (e.g., the
benchmark’s final value). When the manager cares about both absolute and
relative returns, the trade-off acquires an additional risk dimension that
substantially modifies the characteristics of portfolio strategies. The optimal
solutions involve the pricing and replication of spread options.
As a conclusion, Roland was a rare encounter in one’s life, and everyone,
friend, colleague or student alike, will remember him with fondness and
gratitude.
12 Finance Vol. 43 N° 1 2022
References
Papers
Aftalion F. et R. Portait (1988). La technique de ‘portfolio insurance’, Banque,
8 (2), pp. 55-76.
Bajeux-Besnainou I., R. Belhaj, D. Maillard and R. Portait (2011). Portfolio
Optimization under Tracking Error and Weights Constraints, Journal of
Financial Research, 34, pp. 295-330.
Bajeux-Besnainou I., J.B. Jordan and R. Portait (2003). Dynamic Asset Allocation
for Stocks, Bonds and Cash, Journal of Business, 76 (2).
Bajeux-Besnainou I., J.B. Jordan and R. Portait (2001). An Asset Allocation Puzzle:
Comment, American Economic Review, 91 (4), pp. 1170-1179.
Bajeux-Besnainou I. and R. Portait (2002). Pricing Contingent Claims in Incomplete
Markets Using the Numeraire Portfolio, International Journal of Finance,
13 (3), pp. 2291-2310.
Bajeux-Besnainou I. et R. Portait (1999). L’allocation stratégique des actifs : l’apport
de nouveaux modèles d’optimisation de portefeuilles, Bankers, Markets and
Investors, 40, pp. 6-15.
Bajeux-Besnainou I. and R. Portait (1998). Dynamic Asset Allocation in a Mean-
Variance Framework, Management Science, 44 (11-part-2), pp. 79-95.
Bajeux-Besnainou I. and R. Portait (1998). Pricing Stock and Bond Derivatives
with a Multi-Factor Gaussian Model, Applied Mathematical Finance, 5 (3),
pp. 207-225.
Bajeux-Besnainou I. and R. Portait (1997). The Numeraire Portfolio: A New
Perspective on Financial Theory, The European Journal of Finance, 3 (4),
pp. 291-309.
Bajeux-Besnainou I. et R. Portait (1992). Méthodes probabilistes d’évaluation et
modèles à variables d’état : une synthèse, Finance, 13 (1), pp. 23-56.
Bajeux-Besnainou I., R. Portait and G. Tergny (2013). Optimal Portfolio Allocations
with Tracking Error Volatility and Stochastic Hedging Constraints,
Quantitative Finance, 13 (10), pp. 1599-1612.
Bito Ch., P. Poncet et R. Portait (1987a). Les Stratégies d’Options :
Arbitrages Adaptés aux Contrats Français, Analyse Financière, n° 70,
3ème trimestre.
Bito Ch., P. Poncet et R. Portait (1987b). Stratégies Dynamiques d’Utilisation des
Options, Analyse Financière, n° 71, 4ème trimestre.
Charlety-Lepers P. et R. Portait (1997). Assurance et couverture de portefeuille,
volatilité des prix et stabilité des marchés financiers, Revue Economique, 4,
n° 48, pp. 853-858.
Charlety-Lepers P. et R. Portait (1994). L’impact des stratégies d’assurance de

portefeuille sur la volatilité et la stabilité des marchés financiers, Bulletin
mensuel COB, pp. 73-83.
Geman H., T. Demians d’Archimbaud et R. Portait (1990). Une analyse générale
du risque de taux : une approche approfondie, Analyse financière, Octobre,
pp. 43-60.
Nguyen P.D. and R. Portait (2002). Dynamic Asset Allocation with Mean-Variance
Preferences and a Solvency Constraint, Journal of Economic Dynamics and
Control, 26 (1), pp. 11-32.
Poncet P. and R. Portait (1993). Investment and hedging under a stochastic yield
curve: A two-state variable, multi-factor model, European Economic Review,
vol. 37, n° 5.
Poncet P. et R. Portait (1987). Les Marchés à Terme d’Instruments Financiers :
quelques mises au point sur les théories de la couverture et de l’équilibre,
Finance, vol. 8, n° 2.
Poncet P. et R. Portait (1986). Les Opérations sur le MATIF et la Fiscalité, Analyse
Financière, n° 67, 4ème trimestre.
Poncet P. et R. Portait (1983). Un Modèle Analytique Simple du Système Bancaire
Français Incluant la Caisse des Dépôts et Consignations, Finance, vol. 4, n° 1.
Poncet P. et R. Portait (1982). Un modèle de la banque en croissance et de la
vulnérabilité du portefeuille de crédits aux fluctuations des taux d’intérêt,
Finance, vol. 3, n° 2-3.
Poncet P. et R. Portait (1981). Inflation, Choix des investissements et Valeur de la
Firme en croissance : une Analyse théorique, Revue de l’Association Française
de Finance, Avril.
Poncet P. et R. Portait (1979). Faut-il combattre l’inflation ?, Vie et Sciences
Economiques, Octobre.
Poncet P. et R. Portait (1978). La Théorie Financière de la Firme à Partir du
Tableau d’Emplois-Ressources, Revue Française de Gestion, n° 15, Mars-Avril.
Portait R. et R. Allemane (1989). L’évaluation et la gestion d’un portefeuille
comprenant des contrats MATIF, des BTAN et des options sur BTAN et
sur contrats MATIF, Finance, 10, pp. 41-67.
Portait R. et T. Demians d’Archimbaud (1993). Coût des fonds propres bancaires
et gestion actifs-passifs, Bankers, Markets and Investors, 34, pp. 9-16.
Portait R. et T. Demians d’Archimbaud (1989a). Ratios Cooke, titres subordonnés
et titrisation : le coût des fonds propres et la gestion du bilan bancaire
(1ème partie), Banque.
Portait R. et T. Demians d’Archimbaud (1989b). Ratios Cooke, titres subordonnés
et titrisation : le coût des fonds propres et la gestion du bilan bancaire
(2ème partie), Banque.
14 Finance Vol. 43 N° 1 2022
Portait R., T. Demians d’Archimbaud et H. Geman (1990). Une analyse générale

du risque de taux : une approche simplifiée, Analyse financière, Septembre,
pp. 50-63.
Books
Aftalion F., P. Poncet et R. Portait (1998), La Théorie Moderne du Portefeuille,
Que Sais-Je ?, PUF, 128 pages.
Poncet P. et R. Portait (1980), Macroéconomie Financière, Dalloz, 343 pages.
Poncet P., R. Portait et S. Hayat (1996), Mathématiques Financières : Evaluation
des Actifs et Analyse du Risque, Dalloz Gestion, 2ème édition, 373 pages.
Poncet P., R. Portait et B. Jacquillat (1986), Le MATIF : Analyse Economique et
Principes de Couverture, Revue Banque éditeur, 82 pages.
Portait R., P. Charlety-Lepers, D. Dubois et Ph. Noubel (2004), Les décisions
financières dans l’entreprise. Méthodes et applications, PUF, 604 pages.
Portait R. et Ph. Noubel (1998), Les décisions financières dans l’entreprise, PUF,
4ème édition, 483 pages.
Portait R. et P. Poncet (2014), Finance de Marché : Instruments de base, produits
dérivés, portefeuilles et risques, Dalloz, 4ème édition, 1 083 pages.
Book chapters
Bajeux-Besnainou I. and R. Portait (2002a). Dynamic, Deterministic and Optimal
Portfolio Strategies in a Mean-Variance Framework under Stochastic Interest
Rates, in New Directions in Mathematical Finance, John Wiley & Sons,
pp. 100-115.
Bajeux-Besnainou I. and R. Portait (2002b). Separation Theorems: Static or
Dynamic? Chapter in a book, Economica.
Poncet P. et R. Portait (1997). Assurance de Portefeuille, in Encyclopédie des marchés
financiers, Yves Simon éd., Economica, pp. 120-165.
Poncet P. et R. Portait (2010). La Théorie Moderne du Portefeuille : Théorie
et Applications, MBA Finance, Chapitre 28, J.M. Rochi éd., Eyrolles,
pp. 809-842.
Portait R. (1991). Les processus stochastiques et la théorie de l’évaluation des actifs
financiers, in Encyclopédie du Management, Vuibert, pp. 446-466.
II. In gratitude to our professor, colleague, and friend, Roland Portait 15
II. In gratitude to our professor, colleague,

and friend, Roland Portait
By Patricia Charléty, ESSEC Business School
1. Introduction
When I was asked to contribute to this issue of Finance in memory
of Roland Portait, I first thought of working on a research paper started
some years ago, a theoretical attempt to model the emergence of crashes in
financial markets. Our interest in the topic stemmed from a joint presenta-
tion of the literature in the Scientific Committee of the French Security
Exchange Commission. It was not long after the LTCM crisis.2 Our model
predicts that crashes are preceded by a decrease in volatility, ‘le calme avant
la tempête’ as Roland put it.
This example illustrates some of Roland’s personality traits: his enthusiasm
for tackling new topics. Roland was a wonderful source of proposals for
collaboration for his colleagues and students. However, a quick conclusion
should not be expected as Roland insisted on fundamental understanding
at every stage of the examination, avoiding easy handling. He was deep
and demanding, looking for a combination of rigor, relevance and (as
much as possible) simplicity. Roland contributed to the knowledge of
bond markets, interest rate risk, portfolio management and, more broadly,
financial markets, in many different ways: presentations, discussions, classes,
textbooks, mentoring, research articles. He had a great impact on the finance
profession, inspired students, helped and monitored young colleagues.
I was very fortunate to have Roland as a professor when I was a student
at ESSEC. Based on my experience as a teaching assistant there, I decided
to pursue my studies with a Ph.D. and Roland, then Dean of Faculty,
introduced me to Wharton, where he earned his own Ph.D. Following his
example, I started my Ph.D. at Wharton and had the pleasure to spend more
time with Roland, and his wife Dorota, as Roland was visiting Penn. Later
on, when I joined ESSEC as a professor, we became real friends. I have been
2 It resulted in a paper, ‘Assurance et couverture de portefeuille, volatilité des prix et stabilité des marchés financiers: les
enseignements de trois modèles théoriques’. LTCM used high leverage that made the fund’s strategy risky in case of
extraordinary events. Losses became effective with the Asian crisis, aggravated with the Russian crisis and amplified
by the liquidation of securities as a consequence of hedging.
16 Finance Vol. 43 N° 1 2022
blessed to work with Roland as a co-author as he invited me to collaborate

on a new edition of his corporate finance textbook.
2. How much we owe to Roland Portait as students

Those who have had the fortune to be a student of Roland Portait
remember how serious, precise and as simple as possible was the exposition
of even complex concepts in his courses. One of my classmates reminded
me that, as he asked questions to the class, when no one answered, he would
simply say ‘la réponse est…bien évidemment’.3 As a gifted professor, he had a
very fine sense of humor, reflected in this response, as well as in the examples
used, and jokes made in class. Students were eagerly awaiting them.
Roland was curious of (almost) everything, very open (as his house), kind,
caring and humble. He appreciated ESSEC students, provided inspiration
to many of them, and influenced the choices of those who were or became
interested in finance. At CNAM where he held a Chair, he was touched
by the involvement of professional and adult learners who expressed their
gratitude for all he brought to them. As he visited different universities
(in Spain, Switzerland, the United States), I remember him mentioning,
sometimes with amusement, the differences in students’ attitude towards
professors (e.g., the contrasting attitude of French students – who do not
dare to answer questions in class – compared to the Swiss who answer
enthusiastically!).
Roland felt a responsibility to his students. Many academics state that
you do not master a concept thoroughly until you teach it, or even until you
write a textbook. Roland wrote many voluminous textbooks, in different
fields. He was a great professor of Finance, he was also a great macroeco-
nomist. Most colleagues know his contributions in corporate finance and
financial markets. An early contribution (with Patrice Poncet, 1980) is a
book entitled Macroéconomie Financière which thoroughly and precisely
describes financial and monetary mechanisms and their interactions. Indeed,
Roland’s Ph.D. adviser, Anthony Santomero, was a researcher in financial
economics and macroeconomics, and served as president of the Federal
Reserve Bank of Philadelphia for six years. 
3 ‘Obviously, the answer is…’.

Another major textbook of Roland is in corporate finance, Les Décisions

Financières dans l’Entreprise. Indeed, Roland was one of the directors of
Cachous Lajaunie, owned by his family, printers and manufacturers of
metal boxes in Toulouse, who manufactured the famous yellow metal
box towards the end of the 19th century. He was involved in the manage-
ment until the company was sold to Pierre Fabre laboratories in 1989.4
Generations of ESSEC students learned (and still learn) the principles of
financial management and capital budgeting from this textbook. In line
with Roland’s principles, the book is the product of a rigorous reflection
based on theory, translated into a practical methodology, using precise
accounting definitions, for the sake of implementation of the concepts in
‘the real world’ by future managers. It was an honor, and a real pleasure,
to contribute (together with Denis Dubois) to later editions of the book
initially co-authored with Philippe Noubel.
Roland is more well-known for his contributions in the field of port-
folio theory and, more generally, financial markets. Indeed, with my other
colleagues from ESSEC, Roland was part of a small circle of economists
with an in-depth knowledge of derivatives markets, probably linked to their
academic training in American universities. When the Matif, a structure
designed to modernize the French financial market was created in 1986
(futures markets for financial instruments were forbidden until then), they
were among the specialists to which investors seeking hedging instruments
have resorted. Writing textbooks in this field followed naturally. To cite
some of them, Mathématiques Financières (co-authored by Serge Hayat and
Patrice Poncet) in 1993, La Théorie Moderne du Portefeuille (co-authored
by Florin Aftalion) in 1998, or the different versions of Finance de Marché
(co-authored by Patrice Poncet). The English version of the latter, Capital
Market Finance (2021) will for sure become an international reference, as
it covers all aspects of financial markets. It provides a description of the
history and functioning of all markets: primitive assets (equities, interest
and exchange rates, indices, bank loans) and derivatives (swaps, futures,
options, hybrids and credit derivatives). It also covers portfolio theory and
management, and risk assessment and hedging of individual positions as
well as portfolios. In lines with the values of Roland, it combines, as far as
possible, simplicity, rigor and applicability.
4 Anecdotally, Roland used to make us laugh when explaining how bad a marketing person he was, skeptical about the
choice of the (a little provocative) 3-second TV ad that was selected to cut off an interview of president François Mitterand
to illustrate how programs would be interrupted by the commercials in the near future (for the first time a channel was
privatized). The ad received a prize in 1985.
18 Finance Vol. 43 N° 1 2022
3. How much we owe to Roland Portait as colleagues,

and friends
After praising Roland’s textbooks, let me qualify his merit: that was easy
for him. Not only was he brilliant and deep, above all, he loved writing
textbooks. As may be noticed, they were all written with close friends, and
gave rise to days, weekends spent together with plenty of laughs! I remember
Roland mentioning writing textbooks was for him as (more?) enjoyable as
(than) a weekend in Italy. And Roland loved travelling, he was so passionate
by different cultures and history.5
I owe a lot to Roland, as many other colleagues, whose career and
personal choices benefited from his availability and advice. As mentioned
before, Roland invited me to work on a new edition of his corporate finance
textbook, and on an article on financial markets stability. My experience
was shared by many. As his textbooks, all his academic publications are
co-authored by colleagues or doctoral students who were or all became
friends. Those who had the great good fortune to collaborate scientifically on
scientific work6 – Isabelle Bajeux, Riad Belhaj, James Jorda, Didier Maillard,
Pascal Nguyen, Parice Poncet – would agree that Roland led them to bring
the best. Working with Roland, you should expect to be the beneficiary of
his deeply critical yet benevolent and affectionate views. You should also
expect to share his contagious pleasure and fun in taking finance (but not
only finance…) seriously.
Roland had the ability to increase others’ productivity through intense
and joyful collaboration. The influence of Roland goes far beyond his closest
colleagues. With Florin Aftalion, Bernard Dumas and Patrice Poncet, he
built the foundations of ESSEC’s Finance department in the seventies. He
made the department better, not only from an academic perspective but
also from a human perspective. As researchers, we know a ‘good’ depart-
ment, in every sense of the word, is extremely valuable: as for soccer teams,
collective work counts as much as individual work. Thanks to the friend-
ships Roland forged at Wharton, ESSEC Finance department was lucky to
have renowned visiting professors at a time when it was not so common in
French schools and universities. Richard Marston and Anthony Santomero
5 When travelling with him, you did not need a guide as Roland read and remembered everything about the place…
6 I will not cite here his numerous and important work, especially on portfolio management, which is already presented
in another contribution by Patrice Poncet in this special issue dedicated to Roland Portait.
(chaired professors of Economics and Finance in the Wharton school), Marti

Subrahmanyam (chaired Professor of Finance, Economics and International
Business in the Stern School of Business) to cite a few taught at ESSEC in
the late seventies.7 Roland played an essential role in the recruitment and
integration of new colleagues. He was a major contributor in the doctoral
program in finance joint with Aix-en-Provence in the 1980s.
What is true for companies is also true for academic institutions: restruc-
turings are difficult to implement and live. In 1981, in the context of a
financial crisis, ESSEC’s governance changed radically, the local Chamber
of Commerce becoming a key partner of the school. During these critical
times, Roland Portait was elected as Dean of Faculty. He put his construc-
tive intelligence, humanity and sense of common interest to the service of
the faculty and the school, making the restructuring both accepted and
effective, and ensuring a bright future.8
4. An ever young and curious mind

Roland inspired generations of students and colleagues. Anyone who
knew him will miss him, his fine-tune intelligence, his curious mind, his
sensitivity and above all his humor. What you would learn from Roland
is not limited to economics and finance. The unexpected pandemic was a
topic in some of the last e-mails we exchanged. Roland sent us a document
he wrote, applying mathematical models to infectious diseases.
He was also passionate about old movies, history, different cultures, ...
and even video games. When interested in a subject, whatever the subject,
he would deepen and focus all his attention on it. Roland, with his enthu-
siasm, adaptability, creative imagination was an ever-young spirit. As others,
I didn’t think he would leave us so quickly.9 This occasion to honor Roland
is also the occasion to thank Dorota, his wife, and Thomas, his son for
their constant hospitality and kindness. We have so many good memories,
Dorota and Thomas were essential in all things.
7 As an ESSEC student at that time, I didn’t realize how lucky I was to be taught by such internationally renowned professors.
8 Roland also held the Finance chair at CNAM. I had the pleasure to meet some of his colleagues there, and in his house
of Montmorency (Nicolas Curien, Denis Dubois, Didier Maillard, …). I know that we have the same memories of Roland,
as a colleague, co-author, and friend.
9 After a long period without seing each other, we had decided to visit Roland, his wife Dorota and his son Thomas in
Madrid, but the pandemic decided otherwise. As Roland wrote in December 2020, ‘we are all in good health, but, for
the moment, it is difficult to make plans’.
20 Finance Vol. 43 N° 1 2022
Some references
Florin Aftalion, Patrice Poncet, Roland Portait, (2015), La Théorie moderne du
portefeuille (Que sais-je ? t. 3451).
Patricia Charléty-Lepers, Roland Portait (1997), « Assurance et couverture de
portefeuille, volatilité des prix et stabilité des marchés financiers : les ensei-
gnements de trois modèles théoriques ». Revue Economique 1997/4 (n° 48).
Patrice Poncet and Roland Portait (1980), Macroéconomie Financière, DALLOZ.
Patrice Poncet, Roland Portait and Serge Hayat (1996) Mathématiques financières,
DALLOZ.
Patrice Poncet and  Roland Portait (2014), Finance de marché : Instruments de base,
produits dérivés, portefeuilles et risques – 4ème éd.
Patrice Poncet and Roland Portait (2021), Capital Market Finance: An Introduction
to Primitive Assets, Derivatives, Portfolio Management and Risk, Springer ed.
Roland Portait and Philippe Noubel (1998), Les décisions financières dans l’entre-
prise, PUF.
Roland Portait, Patricia Charléty-Lepers, Denis Dubois and Philippe Noubel
(2004), Les décisions financières dans l’entreprise, PUF.
III. Macroéconomie financière (1980) 21
III. Macroéconomie financière (1980)
by Patrice Poncet and Roland Portait,

a personal review after 40 years
By Bernard Dumas, INSEAD, NBER and CEPR
Far from being just a textbook, Macroéconomie financière was in effect a

manifesto calling for a coming together of Macroeconomics and Financial
economics. And, indeed, during the subsequent forty years, Finance has
slowly but surely penetrated Macroeconomics. First came intertemporal
optimization in a deterministic setting, culminating in the textbook of
Blanchard and Fischer (1989). But then risk, the second ingredient of finan-
cial theory, was also called into action. Macroéconomie financière anticipated
this crucial methodological evolution in many important ways.
The first and second parts of the book take stock of Patinkin (1965),
which was already an attempt at developing macroeconomic models from
a well specified microeconomic basis and of which Fischer (1993) wrote:
‘It did, indeed, put an end to two decades of chaos in monetary theory. It
settled many issues, such as dichotomies, Say’s identity, the nature of the
Keynesian system, the requirements for the neutrality, about which the
profession had been arguing for too long’. But, for Patinkin ‘Finance’ was
Money; securities and banks were not in the picture, a shortcoming that
Poncet and Portait (1980) (henceforth PP) remedy, as we shall see.
The third part of PP is about inflation and unemployment. The fourth
proposes a model of financial-market equilibrium, attempting already
to incorporate the financial market and financial intermediaries into a
general-equilibrium system. Finally, the fifth part is about the conduct of
monetary policy.
In this review after forty years, I would like to discuss, with the unfair
benefit of hindsight, two methodological issues and three economic issues
that PP anticipated, and which have been intensely studied since then.
Let me address the first methodological issue. One of the great strengths
of PP is the comparative statics of equilibrium, conducted artfully and
meticulously. It should be commended for that. Comparative statics are
22 Finance Vol. 43 N° 1 2022
and remain the way in which economists convince their readers that the
workings of the model are sound, under some assumptions that it forces
the author to make explicit. In effect, it is a study of the Jacobian of the
equation system defining equilibrium. However, in the tradition of Patinkin,
the equation system is based on the concept of demand curves. While the
demand for consumption (or perishable) goods can to some degree be derived
from static optimization, the demand for long-lasting physical capital or
for securities (financial capital) is a different matter. In principle, it should
be derived from dynamic optimization, a task that Blanchard and Fischer
(1989) took up. These would be simultaneous demands for payoffs from
capital at many different times in the future, from which portfolio demands
would follow. At this point, there are two ways to proceed. One can work
with a setting in which there are only two dates: today and tomorrow. That
is basically what Patinkin and PP do. That kind of analysis is sometimes
viewed as being ‘short run’, a qualification that was applied to Patinkin.
In truth, it should be qualified as being myopic. Requirements for myopia
to be dynamically optimal are known to be very restrictive (one possibility
being logarithmic utility).
The other way to proceed is to derive the optimal dynamic behavior of
economic agents. But then one can define today’s demand curve for capital
only under an assumption about future prices. The ‘right’ assumption – that
is, the assumption that allows a confrontation with data – is to assume that
future markets will be in equilibrium and that all agents assume that they
will be. Unfortunately, the comparative statics of today’s equilibrium, which
are already much more complicated than the comparative statics of demand
alone or supply alone, become completely unwieldy if they are to be derived
under the assumption that all future markets clear. This is because the fixed
point of tomorrow’s market is imbedded within the demand system of today.
Myopic demand behavior may be the only tractable option.
This brings me to a second methodological issue: rational expectations.
Portait and Poncet provide, in the context of inflation, an illuminating rendi-
tion of that concept in the third part of PP, Chapter 9, opposing rational
expectations to adaptive (or extrapolative) expectations. That rendition, which
is relevant to highlight the role of anticipated inflation in forming today’s
equilibrium, is based on the seminal paper by Muth (1961), which sets the
anticipated price level equal to the expected value (as per the model) of the
price level, conditional on all information currently available to economic
agents. In fact, the full power of the concept of rational expectations goes
beyond the conditional expected values as has been demonstrated by Lucas

(1978). If economic agents can form a point anticipation of future prices, they
should equally well be able to form anticipations of future prices for every
possible set of future values of state variables. That means that the concept
allows one to define prices of every point in time as functions of contempo-
raneous state variables and transforms dynamic equilibrium from a system
in which the unknowns are real numbers to one in which the unknowns are
functions. The functional approach can be illustrated with the example of the
Capital Asset Pricing Model (CAPM), which is laid out in the fourth part
of PP. Traditionally, the CAPM was viewed as a model that provided the
expected value of the rate of return on a security given its level of risk. But
both are functions of the state variables and can be derived from the securities’
price as functions of state variables, exactly like Newton’s deterministic Law
of motion F(t) = m × γ(t) can be solved for the trajectory of an object once
γ the acceleration, is viewed as the second derivative of the position of the
object as a function of time, so that the equation becomes a second-degree
differential equation. Macroeconomics and Finance, separately and jointly,
have been revolutionized by this idea (see the textbooks of Ljungqvist and
Sargent (2018) and Dumas and Luciano (2017)). It remains an empirical
matter whether real-world agents hold expectations that are rational with
respect to some macroeconomic model that incorporates them all.
I now come to three economic issues that are richly covered in PP. At
the time of its writing, the debate in Monetary theory dealt with the proper
way to introduce real money balances in an agent’s optimization problem.
They could be introduced directly into the utility function, as in Patinkin
(1985) and in PP for the most part, in a cash-in-advance constraint (Clower
(1967), Lucas (1980)) or as an inventory that needed to be managed subject
to a fixed order cost (Allais (1947), Baumol (1952) and Tobin (1956)). With
these specifications, a change in the amount of money circulating in the
economy would have a real effect; money, that is, would not be neutral, as
explained in PP, Chapter 11, with reference to Mundell (1971). But most
economists agreed, following Fisher (1896, 1930), that the effect would
exist ‘in the short run’ only. If one neglected that effect, there would be
no need to introduce money balances at all, which lead Woodford (2003)
and others to define a cashless economy. Government debt and government
bonds are more important than money as the outstanding amount of them
is much larger. Like money balances would, they deprive physical capital of
sources of financing. One says that they ‘crowd out’ capital. In a cashless
24 Finance Vol. 43 N° 1 2022
economy, it is in the end fiscal policy that has a real effect. For that reason,
it did not make sense to consider the issuance of money without regard
to the issuance of government debt (Sargent and Wallace (1981)). In the
absence of money balances, the price level is determined by the Fiscal Theory
of the Price Level (Sims (1994)): government bonds commit contractually
the government to pay a nominal amount of a virtual currency so that the
total face value of the bonds outstanding is a nominal amount, whereas their
real value is equal to the present discounted value of future real government
budget surpluses.10 The ratio of the two is the price level. As can be seen,
Monetary theory has run away from PP during the last forty years.
That is less true in regard to the conduct of Monetary policy, to which
the fifth part of PP is devoted. In 1980, authorities, in charge of keeping
inflation under check by controlling the money supply, were focusing on
monetary aggregates, which meant the outstanding amount of money in
circulation. Regulating that amount was, however, fraught with difficul-
ties, which are very well explained in PP, one of which being the difficulty
of estimating money demand (see, for instance, Goldfeld (1976)). For
that reason, while monetary aggregates remained the long-term target of
monetary policy, short-term and medium-term targets had been instituted
(PP, Chapter 15, Sections 2 and 3). One of them was the nominal rate of
interest, at which monetary authorities were supplying or buying government
bonds elastically (the ‘intervention rate’, that is). That practice has evolved
to ‘inflation targeting’, as in the modern Taylor (1993) (or Henderson and
McKibbin (1993)) rule which relates the intervention rate to the target
level of inflation without regard to monetary aggregates, and which has,
indeed, brought inflation under control. Remarkably, that evolution was
implicit in the PP book.
I come to the second economic issue that I want to address: sticky
prices and sticky wages, which are correctly presented in PP as the principal
foundation of Keynesian economics (Chapter 3, Section 2). PP realize fully
that, when prices are not adjusted, some rationing has to occur in some
markets (such as the labor market), with spillovers to other markets (Barro
and Grossman (1976), Malinvaud (1977), Benassy (1982)). That would,
indeed, have been the rigorous way to go. But the literature has found the
10 In that context, one must introduce a distinction between Ricardian fiscal policy (otherwise called ‘passive’ fiscal policy;
see Leeper (1991)), in which taxes raised and, therefore, the budget surplus are related to the debt outstanding and
non Ricardian (or ‘active’) fiscal policy in which the budget surplus is exogenous.
approach too cumbersome and has replaced it with a simpler framework, in

which oligopolistic firms set their prices but not freely so or not costlessly
so. Under Calvo (1983) pricing, at each point in time, some firms that are
selected at random are free to adjust their prices while others must continue
producing at the possibly loss-making price of the previous period.11 Under
Rotemberg (1982) pricing, quadratic ‘menu costs’ are imposed, with the
same constraint on firm production. These are the current foundations upon
which relies the so-called Phillips curve relating output and employment
to the price of goods. Large-scale models of Dynamic Stochastic General
Equilibrium (DSGE) are developed along this line (see Smets and Wouters
(2007)) and serve as roadmaps to economic policy. The rationing approach
has yet to come back in vogue.
The third economic issue to be discussed is the modelling of banks’
balance sheets, to which PP devote Section 2 of Chapter 6.12 Banks, like
any firm, make decisions on the basis of the costs of their operations. When
the deposit rate is regulated, the banks may be rationed in the amount
of deposit they receive. When PP was written, the area of Banking was a
very active one and this is reflected in the book, which includes an effort
to incorporate financial institutions into the general equilibrium of the
financial market and the economy. The area has evolved subsequently on
its own with the important work of Diamond and Dybvig (1983) on bank
runs and the work of Kiyotaki and Moore (1997) on the role of collateral
in the lending activity and the possibility of credit cycles.13 For many years,
the area has been a specialized field, separate from Macroeconomics until
the financial crisis of 2007-2008 broke out.14 The shortage of liquidity that
occurred was interpreted as a bank run on the securities that are used as
collateral in a form of interbank lending known as repurchase agreements
(Gorton and Metrick (2012)). It has come to the point that a new subfield
known as ‘Intermediary Asset Pricing’ has emerged, stemming from the
path-breaking article of Adrian, Etula and Muir (2014). The balance sheets
of financial intermediaries and brokers and the risk of default that is attached
to them is introduced as a risk factor in the CAPM. Forty years ago, PP
knew already what central role is played by financial intermediaries in the
general equilibrium.
11 For the application of this approach to International Economics, see Obstfeld and Rogoff (1996).
12 This contribution had been anticipated in Poncet (1977).
13 See also Geanakoplos (2014) and Geanakoplos and Fostel (2015).
14 DGSE models have typically abstracted from collateral constraints. See, however, Iacovello (2005).
26 Finance Vol. 43 N° 1 2022
On every page of the PP book the spirit of inquiry is visible. While

providing many answers, PP provides also many questions and exudes a
sense of the provisional character of existing models. It challenges the reader
to pick up the baton of inquiry, almost engaging him or her into a dialog.
The sections with wiggles as margin markings are tantalizing bits that ravish
the demanding reader (‘Le lecteur exigeant’ of page 52). The PP book was
a remarkable piece of scholarship.
References
Adrian, T., E. Etula and T. Muir, 2014, Financial Intermediaries and the Cross-
Section of Asset Returns. The Journal of Finance, LXIX, 2557-2596.
Allais, M., 1947, Économie et intérêt, Paris: Imprimerie Nationale.
Barro, R. and H. Grossman, 1976, Money, Employment and Inflation, Cambridge
University Press.
Baumol, W., 1952, The Transactions Demand for Cash: An Inventory Theoretic
Approach. The Quarterly Journal of Economics, 66, 545-556.
Bénassy, J.-P., 1982, The Economics of Market Disequilibrium, Academic Press.
Blanchard, O. and S. Fischer, 1989, Lectures on Macroeconomics, The MIT Press.
Calvo, G. A., 1983, Staggered Prices in a Utility-Maximizing Model. Journal of
Monetary Economics, 12, 983-998.
Clower, R., 1967, A Reconsideration of the Microfoundations of Monetary Theory.
Western Economic Journal, 6, 1-9.
Diamond, D. W. and P. H. Dybvig, 1983, Bank Runs, Deposit Insurance, and
Liquidity. Journal of Political Economy, 91, 401-419.
Dumas, B. and E. Luciano, 2017, The Economics of Continuous-time Finance, The
MIT Press.
Fischer, S., 1993, Money, Interest, and Prices, in Haim Barkai, Stanley Fischer,
and Nissan Liviatan, eds., Monetary Theory and Thought: Essays in Honour
of Don Patinkin (London: Palgrave Macmillan).
Fisher, I., 1896, Appreciation and Interest: A Study of the Influence of Monetary
Appreciation and Depreciation on the Rate of Interest with Applications to
the Bimetallic Controversy and the Theory of Interest, 11, Issue 4, American
Economic Association - Publications.
Fisher, I., 1930, The Theory of Interest, MacMillan.
Geanakoplos, J. and A. Fostel, 2015, Leverage and Default in Binomial Economies:
A Complete Characterization, Econometrica, 83, 2191-2229.
Geanakoplos, J. and W. Zame, 2014, Collateral Equilibrium: I: A Basic Framework.
Economic Theory, 56, 443-492.
Goldfeld, S. M., 1976, The Case of the Missing Money. Brookings Papers on
Economic Activity, 3, 683-739.
Gorton, G. and A. Metrick, 2012, Securitized Banking and the Run on Repo.
Journal of Financial Economics, 104, 425-451.
Henderson D. W. and W. McKibbin, 1993, A Comparison of Some Basic Monetary
Policy Regimes for Open Economies: Implications of Different Degrees of
Instrument Adjustment and Wage Persistence, Carnegie-Rochester Conference
Series on Public Policy, 39, 221-318.
28 Finance Vol. 43 N° 1 2022
Iacoviello, M., 2005, House Prices, Borrowing Constraints, and Monetary Policy
in the Business Cycle. American Economic Review, 95, 739-764.
Kiyotaki, N. and J. H. Moore, 1997, Credit Cycles, Journal of Political Economy,
105, 211-248.
Leeper, E. M., 1991, Equilibria under ‘active’ and ‘passive’ monetary and fiscal
policies. Journal of Monetary Economics, 27, 129-147.
Lucas, R. E. Jr., 1978, Asset Prices in an Exchange Economy. Econometrica, 46,
6, 1429-1445.
Lucas, R.E., Jr., 1980, Equilibrium in a Pure Currency Economy, in: J. Kareken
and N. Wallace, eds., Models of Monetary Economies (Federal Reserve Bank
of Minneapolis, Minneapolis, MN) 131-146.
Ljungqvist, L. and T. J. Sargent, 2018, Recursive Macroeconomic Theory, The MIT
Press.
Malinvaud, 1977, The Theory of Unemployment Reconsidered, Basil Blackwell.
Mundell, R., 1971, Monetary Theory: Inflation, Interest and Growth in the World
Economy, Goodyear Publishing.
Muth, J. F., 1961, Rational Expectations and the Theory of Price Movements.
Econometrica, 29, 315-335.
Obstfeld, M. and K. Rogoff, 1996, Foundations of International Macroeconomics,
The MIT Press.
Patinkin, D., 1965, Money, Interest and Prices, Harper and Row.
Poncet, P., 1977, Monetary and Fiscal Policies in a Neo-classical Model: The French
Case, unpublished Ph.D. thesis, Northwestern University.
Poncet, P. and P. Portait, 1980, Macroéconomie financière, Dalloz.
Rotemberg, J. J., 1982, Sticky Prices in the United States. Journal of Political
Economy, 90, 1187-1211.
Sargent, T. J. and N. Wallace, 1981, Some Unpleasant Monetarist Arithmetic.
Federal Reserve Bank of Minneapolis Quarterly Review, Fall, 1-15.
Sims, C. A., 1994, A Simple Model for Study of the Determination of the Price
Level and the Interaction of Monetary and Fiscal Policy. Economic Theory,
381-399.
Smets, F. and R. Wouters, 2007, Shocks and Frictions in US Business Cycles:
A Bayesian DSGE Approach. American Economic Review, 97, 586-606.
Taylor, J. B., 1993, Discretion versus Policy Rules in Practice. Carnegie-Rochester
Conference Series on Public Policy, 39, 195-214.
Tobin, J., 1956, The Interest Elasticity of the Transactions Demand for Cash.
Review of Economics and Statistics, 88, 241-247.
Woodford, M., 2003, Interest and Prices: Foundations of a Theory of Monetary Policy,
Princeton University Press, Princeton, NJ.
IV. A Survey of Roland Portait’s Contributions 29
to the Theory of Dynamic Portfolio Choice
IV. A Survey of Roland Portait’s Contributions

By Isabelle Bajeux-Besnainou, Carnegie-Mellon
University, Tepper School of Business and
Benjamin Croitoru, McGill University,
Desautels Faculty of Management
It is a great honor for us to share this survey of Roland Portait’s work on

portfolio choice. During his prolific academic career, Roland tackled complex
financial problems and always strived to develop intuitive and elegant models
and to provide impactful interpretations. The finance research community
has greatly benefited from his work. Thank you, Roland for showing us
the way and for all the intellectual stimulation you brought. It has been
an incredible privilege to know you, both professionally and personally.
“If you can’t explain it simply, you don’t understand it well enough.”
Albert Einstein
1. Introduction
Since the pioneering work of Markowitz in the 1950’s, a large amount
of academic research has focused on portfolio choice. However, not much
is taught in business schools that goes beyond static mean-variance port-
folio theory, even though research has gone far beyond this basic model,
introducing constraints that appear in the real world, and considering that
investors have the capability of dynamically rebalancing their portfolios. As
a result, there is a big discrepancy between how portfolio management is
tackled in the practical and in the academic worlds. In our view, the main
reason for this discrepancy is that dynamic models (which include portfolio
rebalancing) tend to be too technical, abstract and general, focusing on
state variables instead of assets similar to the ones that are actually traded.
In several articles, Roland Portait and his co-authors bridge part of this
gap between academia and the practice of portfolio optimization. They show
how dynamic models can lead to intuitive, applicable results by examining
some examples of portfolio optimization in an environment that is tractable
30 Finance Vol. 43 N° 1 2022
yet includes securities with realistic characteristics and captures several

features of actual markets, such as stochastic interest rates and time-varying
stock market expected return.
This article surveys, in a unified framework, several of these contribu-
tions. In a continuous-time environment, we use a version of the Vasicek
(1977) model of interest rates where a stock is additionally available for
trading. In that context, Bajeux-Besnainou, Jordan and Portait (BJP, 2001)
use their earlier work on the numeraire (aka growth-optimal) portfolio
(Bajeux-Besnainou and Portait 1997) to characterize the optimal terminal
wealth of an investor with constant relative risk aversion (CRRA) expected
utility preferences. The optimal strategy is shown to consist of a constant
weight combination of a riskless bond fund and the numeraire portfolio.
They exploit this result to provide an explanation for the asset allocation
puzzle highlighted by Canner, Mankiw and Weil (1997), who showed
that typical asset allocation advice is not consistent with the standard,
static mean-variance portfolio theory. BJP (2001) show that in a dynamic
framework, the standard advice is consistent with theory, both qualitatively
and quantitatively. In particular, the optimal ratio of bonds versus stocks
increases with investors’risk aversion, which contradicts static mean-vari-
ance portfolio theory, but is typically recommended by financial advisors.
Bajeux-Besnainou, Jordan and Portait (BJP, 2003) extend these results
to the case of hyperbolic absolute risk aversion (HARA) utility functions
with a positive minimum subsistence level, which implies more realistic
behavior with, in particular, weights that are not constant, but depend on
the investor’s wealth.
In a related article, Bajeux-Besnainou and Portait (BP, 1998) move away
from expected utility and examine mean-variance efficient portfolios with
dynamic trading. This is a valuable undertaking, because the mean-variance
framework has proven tremendously influential in both academia and the
financial industry. However, the standard version of this theory is rather
restrictive, as it assumes buy and hold portfolios and does not take into
account the possibility of rebalancing over time. In a continuous-time
economy with dynamic trading, BP (1998) characterize the optimal terminal
wealth, and explicitly derive the optimal portfolio in some particular cases.
They show that dynamic trading leads to a considerable improvement in
portfolio efficiency relative to the static portfolios of the standard theory.
Nguyen and Portait (2002) extend their work and examine the impact of
adding a solvency constraint, which precludes the wealth from ever being
negative.
One implication of these results – both under expected utility and under
mean-variance preferences – is that investors should optimally hold a combi-
nation of a dynamically rebalanced portfolio of risky and instantaneously
risk-free assets, and a zero-coupon bond (with a maturity coinciding with
the investment horizon). This shows that long-term bonds have a role to
play in dynamic portfolio optimization, even though such bonds are often
ignored in standard models.
2. The Martingale Approach to Portfolio Optimization and the Numeraire Portfolio
The rest of this article is organized as follows. In Section 2, without
making any specific assumptions, we provide a general characterization
of the structure of the optimal policies. In Section 3, we introduce the
Consider an investor maximizing the expected utility of terminal wealth:
continuous-time model. Sections 4 and 5 describe the main results, in
the cases of expected utility and mean-variance preferences, respectively.
Section 6 concludes.
2. The Martingale Approach to Portfolio Optimization and the Numeraire Portfolio
max ��,
�

2. The Martingale Approach to Portfolio Optimization
and the Numeraire Portfolio
Consider an investor maximizing the expected utility of terminal wealth:
where θ denotes the investor’s portfolio strategy, subject to a standard dynamic budget constraint, with
Consider
the initial cost of an investor
the portfolio being maximizing
equal to the the expectedinitial
investor’s utility of terminal
wealth W(0). wealth:
We assume that the
markets are complete.
max ��,
�

where θ denotes the investor’s portfolio strategy, subject to a standard
dynamic budget constraint, with the initial cost of the portfolio being equal to
In the absence of arbitrage opportunities, the fundamental theorem of asset pricing implies that there
where θ denotes the investor’s portfolio strategy, subject to a standard dynamic budget constraint, with
the investor’s initial wealth W(0). We assume that the markets are complete.
exists a state‐price density, i.e., a strictly positive random variable ξ(T) such that the price at time 0 of
the initial cost of the
any time T‐payoff, portfolio being equal to the investor’s initial wealth W(0). We assume that the
In X(T), equals E[ξ(T)X(T)]
the absence of arbitrage(without loss of generality,
opportunities, it is assumed
the fundamental ofξ(0) = 1). In a
that
theorem
markets are complete.
asset pricing implies that there exists a state-price density, i.e., a strictly posi-
complete market, the state‐price density is unique.
tive random variable ξ(T) such that the price at time 0 of any time T-payoff,
X(T), equals E[ξ(T)X(T)] (without loss of generality, it is assumed that
ξ(0) = 1). In a complete market, the state-price density is unique.
In the absence of arbitrage opportunities, the fundamental theorem of asset pricing implies that there
From Cox and Huang (1989), we know that the investor’s optimal terminal wealth is the solution of
exists a state‐price density, i.e., a strictly positive random variable ξ(T) such that the price at time 0 of
From Cox and Huang (1989), we know that the investor’s optimal
any
time T‐payoff,
terminal X(T),
wealth is E[ξ(T)X(T)]
equals the solution (without
of loss of generality, it is assumed that ξ(0) = 1). In a
complete market, the state‐price density is unique.
max ��,
��

subject to
From Cox and Huang (1989), we know that the investor’s optimal terminal wealth is the solution of
subject to

��
subject to
32 Finance Vol. 43 N° 1 2022
�� 0�. (1) (1)

While the original problem involves a large (and in continuous time,
While the original problem involves a large (and in continuous time, an infinite) number of constra
an infinite) number of constraints (as the dynamic budget constraint must
(as the dynamic budget constraint must hold at all times and in all states of nature), this latter prob
hold at all times and in all states of nature), this latter problem involves a
single constraint. Therefore, it can be solved as an optimization problem
involves a single constraint. Therefore, it can be solved as an optimization problem with a single equa
with
constraint, and a single equality
we refer constraint,
to this problem and
as a we referproblem.
static to this problem as a staticbetween the
The equivalence
problem.
optimization The stems
problems equivalence
from between the two of
the assumption optimization problems stems
market completeness and the fundame
theorem from the assumption
of asset pricing: any oftrading
marketstrategy
completeness and
that is the fundamental
admissible theoremdynamic prob
in the original,
of asset pricing: any trading strategy that is admissible in the original,
satisfies the constraint in the static problem. Moreover, in a complete market, any terminal wealth t
dynamic problem satisfies the constraint in the static problem. Moreover,
in a complete market, any terminal wealth that satisfies the constraint in
the static problem can be attained by a portfolio strategy that satisfies the
dynamic budget constraint.
The static problem readily leads to a simple characterization of the
optimal terminal wealth. The first order condition writes:

�� ,
where y denotes the Lagrange multiplier. Intuitively, the first‐order condition states that, at the
where y denotes the Lagrange multiplier. Intuitively, the first-order condi-
optimum, the marginal benefit of terminal wealth is proportional to its marginal cost (given by the value
tion states that, at the optimum, the marginal
of the state price density). Due to the concavity of the benefit ofthe inverse function of its first
utility function, terminal wealth
is proportional to its marginal cost (given by the value of the state price
derivative exists and we have
density). Due to the concavity of the utility function, the inverse function
of its first derivative exists and we have:
��
The value of the Lagrange multiplier y can be obtained by substituting

this expression in the budget constraint (1). Thus, the optimization problem
The value of boils
the Lagrange
down to multiplier y can
the solution of abe single
obtained by substituting
equation this unknown,
with a single expression y,in the budget
constraint (1).
and the optimal consumption can be characterized very simply,a although
Thus, the optimization problem boils down to the solution of single equation with a
single unknown, y, and the optimal consumption can be characterized very simply, although deriving the
deriving the optimal portfolio is more challenging.
optimal portfolio is more challenging.
From Long (1990), it is known that there exists a portfolio that, if its
value is used for discounting, makes all discounted asset prices martingales,
leading to an alternative formulation of the fundamental theorem and
From Long (1990), it is known that there exists a portfolio that, if its value is used for discounting, makes
characterization of the optimal wealth, which is used in BP (1998) and BJP
all discounted asset 2003).
(2001, prices The
martingales,
so-calledleading to an
numeraire alternative
portfolio, formulation
whose of the
value equals the fundamental
inverse of the state-price density, can be shown to coincide with the optimal
theorem and characterization of the optimal wealth, which is used in BP (1998) and BJP (2001, 2003).
The so‐called numeraire portfolio, whose value equals the inverse of the state‐price density, can be
shown to coincide with the optimal portfolio of an investor with logarithmic utility. Because of the well‐
known myopic behavior of such an investor, the composition of the numeraire portfolio can be easily
The so‐called numeraire portfolio, whose value equals the inverse of the state‐price density, can
From Long (1990), it is known that there exists a portfolio that, if its value is used for discounting, makes
shown to coincide with the optimal portfolio of an investor with logarithmic utility. Because of the w
all discounted asset prices martingales, leading to an alternative formulation of the fundamental
known myopic behavior of such an investor, the composition of the numeraire portfolio can be ea
theorem and characterization of the optimal wealth, which is used in BP (1998) and BJP (2001, 2003).
The derived. BP (1998) and BJP (2001, 2003) show that the numeraire portfolio can be used to characte
so‐called numeraire portfolio, whose value
IV. A equals
Survey the inverse
of Roland Portait’sof the state‐price 33
Contributions density, can be
the optimal portfolio policy for all investors, including those with non‐logarithmic preferences.
shown to coincide with the optimal portfolio of an investor with logarithmic utility. Because of the well‐
known
myopic behavior of such an investor, the composition of the numeraire portfolio can be easily
derived. BP (1998) and BJP (2001, 2003) show that the numeraire portfolio can be used to characterize
portfolio of an investor with logarithmic utility. Because of the well-known
Specifically, the static problem can be formulated in terms of the numeraire portfolio as follows:
the optimal portfolio policy for all investors, including those with non‐logarithmic preferences.
myopic behavior of such an investor, the composition of the numeraire
portfolio can be easily derived. BP (1998) and BJP (2001, 2003) show that

the numeraire portfolio can be used to characterize the optimal portfolio
policy for all investors, including those with non-logarithmic preferences.
max ��,
Specifically, the static problem can be formulated in terms of the numeraire portfolio as follows:
��
Specifically, the static problem can be formulated in terms of the nume-
raire portfolio as follows:

subject to max ��,
��
subject to
subject to �� 0�, (2) (2)

where H(T) denotes the value at T of the numeraire portfolio (assuming without loss of generality that

where H(T) denotes the value at T of the numeraire portfolio (assuming
H(0) = 1). This leads to the following characterization of the optimal terminal wealth:
without loss of generality that H(0) = 1). This leads to the following char-
��
acterization of the optimal � ��0�,
terminal wealth: (2)

�� = ��
Bajeux-Besnainou and Portait (1997) survey the properties and potential

uses of the numeraire portfolio. Being the optimal portfolio of a logarithmic
Bajeux‐Besnainou and itPortait
investor, (1997) survey
is instantaneously the properties
mean-variance and potential
efficient. uses of to
It is also identical the numeraire
portfolio. Being
the growth-optimal portfolio: not only does it maximize expected growthmean‐variance
the optimal portfolio of a logarithmic investor, it is instantaneously
efficient. It is also identical to the growth‐optimal portfolio: not only does it maximize expected growth
at any horizon, but it also asymptotically dominates any other strategy,
at any horizon, but it also asymptotically dominates any other strategy, as the probability that its value is
as the probability that its value is higher tends to one as the time horizon
tends to infinity.
higher tends to one as the time horizon tends to infinity.
The numeraire portfolio makes it possible to compute the prices of contin-

gent claims without using probability changes. Since the prices of all assets
The numeraire discounted
portfolio by the numeraire
makes portfolio
it possible to arethe
compute martingales
prices of under the original,
contingent claims without using
“historical” probability, prices can be expressed as a simple expectation,
probability changes. Since the prices of all assets discounted by the numeraire portfolio are martingales
without a probability change. For example, expressed as a simple expectation, without a
under the original, “historical” probability, prices can be the price at time 0 of a security
with payoff X(T) equals E[X(T)/H(T)]. Bajeux-Besnainou and Portait (1997)
probability change. For example, the price at time 0 of a security with payoff X(T) equals E[X(T)/H(T)].
show that this result prevails even under incomplete markets. In this case,
Bajeux‐Besnainou and Portait (1997) show that this result prevails even under incomplete markets. In
securities that are not marketed may not have a unique price and E[X(T)/H(T)]
this case, securities that are not marketed may not have a unique price and E[X(T)/H(T)] yields the price
yields the price that prevails if the economy admits a representative agent
that prevails if the economy admits a representative agent with logarithmic preferences (this particular
with logarithmic preferences (this particular price is only one element of the
price is only one element
set of viable, of the set of viable, no‐arbitrage prices. More specific assumptions must be
no-arbitrage prices. More specific assumptions must be made
made to determine the particular price that will prevail in equilibrium).
to determine the particular price that will prevail in equilibrium).

BJP (2003) consider the case of a HARA utility function
that prevails if the economy admits a representative agent with logarithmic preferences (this particular
made to determine the
The numeraire portfolio makes it
price is only one element under the original, “historical” probability,
of the set of viable, no‐arbitrage prices. More specific assumptions must be
probability changes. Since the pric
probability change. For example, the price
under the original, “historical” pr
Bajeux‐Besnainou
BJP (2003) consider the case of a HARA utility function and Portait (1997) show
34 Finance Vol. 43 N° 1 2022
probability change. For example,
BJP (2003) consider the
this case, securities that are not marketed m
Bajeux‐Besnainou and Portait (19
BJP (2003) consider the case of a HARA utility function that prevails if the economy admits a repre

this case, securities that are not m
��
� price is only
BJP (2003) consider the case of a HARA �utility
�� one element
� function
� ��
of the set of viab
�� = � ��that prevails if the economy admi
, � � �
�made to determine the particular price that
� �� =� � � ,
��
� �price is only one element of the
� ��
�� = � � , made to determine the particular
��
where Ŵ can be interpreted as the minimum subsistence level:
because the marginal utility tend
BJP (2003) consider the case of a HARA utilit
where Ŵ can
where can be interpreted asas
be interpreted the
the minimum
minimum subsistence
subsistence level:
level: because the ma
because
infinity as the wealth becomes close to Ŵ, the investor will pick an investment strategy that ensures
where
the marginal utility tends to infinity as the wealth becomes
infinity as the wealth becomes close to Ŵ, the investor will pick an investment strat
Ŵ can the
be Lagrange
interpreted as the minimum level: because
the terminal wealth exceeds this level. In that case, the optimal terminal wealth is
subsistence
close
where to
the marginal
Ŵ utility
,can be interp
BJP (2003) consider the case of a H
where the investor multiplier
will pick an can be calculated
investment strategy by substituting
that ensures this
that thevalue into
terminal the tends
static to
bu
infinity as the wealth becomes close to Ŵ, the investor will pick an investment strategy that ensures that infinity as the wealth be
constraint (2). Note that the CRRA case considered in BJP (2001) is a special case of this, in which Ŵ
where the wealth Lagrange
exceedsmultiplier
this level.can be calculated
In that by substituting
case, the optimal terminal

this
wealthvalue
is into the static bu
the terminal wealth exceeds this level. In that case, the optimal terminal wealth is the terminal wealth exc
and can be interpreted as the relative risk aversion. The expression reveals that the optimal policy
constraint (2). Note that the CRRA case considered in BJP (2001) is a special case of this, in which Ŵ ��
Lagrange multiplier can ∗ ��
where the be calculated
� � �� by ��substituting this value into the static bu
� =� , (3)
combination of a zero‐coupon bond paying‐off Ŵ at T, and a position yielding the value of the nume
and can be interpreted as the relative risk aversion. The expression reveals that the optimal policy (3)

portfolio, raised to the power 1/γ at T.
where the Lagrange multiplier can be calculated ∗ ��by substituting this value into the static bu
� by
the Lagrange multiplier can � calculated
be =� �� , this value
� substituting
where
portfolio, raised to the power 1/γ at T. � ∗ �� = � � � �� , (3)

into the static budget
constraint (2). Note that the CRRA case considered
in BJP (2001) is a special case of this, in where which Ŵ  = 0, be inter-as the minimu
andinterpreted
can be can
In a related article, BP (1998) tackle the determination of dynamically mean variance efficient (DM
preted as the relative risk aversion. The expression reveals that the optimal
infinity as the wealth becomes close to Ŵ, th
portfolios, policy
i.e., isportfolios
a combination of a zero-coupon
that minimize the variance bondfor paying-off
a given
where Ŵ of
level
In a related article, BP (1998) tackle the determination of dynamically mean variance efficient (DM atexpected
can T,be
and a return, taking
interpreted as t
the terminal wealth exceeds this level. In tha
account
portfolios,
position
the
i.e., yielding
possibility
portfolios the
of that value of
rebalancing
minimize the
the numeraire
portfolio
the portfolio,
variance during the
for a given raised to
investment the power
period (whereas
level of expected stand
return, taking
infinity as the wealth becomes clo
account 1/
Markowitz‐type γ atpossibility
the T.portfolio of theory only the
rebalancing considers buy‐and‐hold
portfolio during
for a given the strategies).
investment The DMVE
period portfolio
(whereas
the terminal wealth exceeds this le stand
portfolios, i.e., portfolios that minimize the variance level of expected return, taking
expected return E solves the following problem
Markowitz‐type portfolio
Inpossibility
a related theory
article, BPonly
(1998) considers
tackle buy‐and‐hold
the determination strategies). The DMVE portfolio
of dynamically
account
portfolios, the
i.e., of
portfolios rebalancing
that minimize the portfolio
the variance during the investment
for a given period (whereas
level of expected return, stand
taking
expected return E solves the following problem ∗ ��
mean variance efficient (DMVE) portfolios, i.e.,
portfolios that minimize � =
Markowitz‐type
account the the varianceportfolio
possibility of theory only the
rebalancing considers buy‐and‐hold
portfolio during the strategies). period
investment The DMVE portfolio
(whereas stand
for a given level of expected return, taking into account the
Markowitz‐type
possibilityportfolio theory the
of rebalancing only considers
portfolio buy‐and‐hold strategies). The DMVE portfolio
1 during�the investment period (whereas (4)
standard, Markowitz-type portfolio min �� ,
�� 21 theory� only considers buy-and-hold (4)
strategies). The DMVE portfolio minwith ��
expected �, return E solves the following
�� 2
problem 1 (4)
min �� ,
subject to �� 2
1 (4)

subject to min �� , (4)
�� 2

subject to subject to
�� , (5)
subject to ��
�� , (5) ��0�. (6)
(5)
�� 0�. (6)
�� , (5)

��
Differentiating shows that the optimal terminal wealth is � ��0�. (6) (6)
�� , (5)

Differentiating shows that the optimal terminal wealth is
�� 0�. (6)


� ∗ �� , (7) (7)
� ∗ ��
� �� , �� (7)

� ∗ �� ,
where the values of the Lagrange multipliers ψ and φ are obtained by substituting the optimal we (7)

into the constraints (5)‐(6). The equation reveals that any DMVE portfolio consists of a combination
∗ ��
where the values of the Lagrange multipliers ψ and φ are obtained by

substituting the optimal wealth into the constraints (5)-(6). The equation
reveals that any DMVE portfolio consists of a combination of a zero-
coupon bond maturing at T (and yielding φ) and a position in a portfolio
yielding the inverse of the value of the numeraire portfolio at time T. It
has a structure similar to the optimal portfolio of an investor with HARA
preferences.
These characterizations, valid in any complete market setup (discrete or
continuous) reveal that the key challenge, in computing the optimal portfolio
continuous‐time economies. In the rest of this survey, we focus on one of these cases, with stochastic
strategies, consists of determining portfolios that yield, at the investment
interest rates, which has proven especially fruitful, in particular in resolving the asset allocation puzzle of
continuous‐time economies. In the rest of this survey, we focus on one of these cases, with stochastic
horizon T, the value of the numeraire portfolio, raised to a power that
Canner, Mankiw and Weil (1997).
interest rates, which has proven especially fruitful, in particular in resolving the asset allocation puzzle of
depends on the specific objective function under consideration. BP and
BJP tackle this challenge in several different continuous-time economies.
Canner, Mankiw and Weil (1997).

In the rest of this survey, we focus on one of these cases, with stochastic
interest rates, which has proven especially fruitful, in particular in resolving
3. The Continuous‐Time Model
the asset allocation puzzle of Canner, Mankiw and Weil (1997).
3. The Continuous‐Time Model

The 3. Themodel
continuous‐time Continuous-Time
uses the Vasicek Model
(1977) one‐factor model of interest rates, with a stock
being additionally available. There is one state variable, the short rate, with dynamics
The continuous‐time model uses the Vasicek (1977) one‐factor model of interest rates, with a stock
The continuous-time model uses the Vasicek (1977) one-factor model
being additionally available. There is one state variable, the short rate, with dynamics
of interest rates, with a stock being additionally available. There is one state
variable, the short rate, with dynamics
�� = �� ,
�� = �� ,

where a where ar, br and σr are constant and zr is a standard Brownian motion. Three
r, br and σr are constant and zr is a standard Brownian motion. Three securities are traded, an
securities are traded, an instantaneously riskless money market account, a
instantaneously riskless money market account, a stock and a long‐term bond, with respective dynamics
where a , b and σ are constant and z is a standard Brownian motion. Three securities are traded, an r r stockr and a long-term bond,
r with respective dynamics
instantaneously riskless money market account, a stock and a long‐term bond, with respective dynamics
��
= ��,
��
��
= ��,
��
= �� ,
��
��
= �� ,
��
�
= �� .
��
� ��
= �� .
��

The two Brownian motions z and z are assumed to be independent. No arbitrage implies that there
= �� .
��
36 Finance Vol. 43 N° 1 2022

two Brownian motions z and zr are assumed to be independent. No arbitrage implies that t
t exist associated market prices of risk λ and λr, such that the risk premia of the two risky assets
al to The two Brownian motions z and zr are assumed to be independent. No
arbitrage implies that there must exist associated market prices of risk λ and
λr, such that the risk premia of the two risky assets are equal to
�� = �� ,

�� = �� .
a single factor of interest rate risk, one long‐term bond (in addition to the money market acco
The market
fficient to complete prices of
the market. All risk are long‐term
other assumed tobonds
be constant, as are the stock
are redundant. In order to maxim
volatility coefficients σ1 and σ2.
ability, we assume that one zero‐coupon bond fund with constant maturity t + K and price
market prices of risk are assumed to be constant, as are the stock volatility coefficients σ
With a single factor of interest rate risk, one long-term bond (in addi-
able. In practice, this would be a continuously rebalanced portfolio of the money market fund 1 and σ2
a single factor of interest rate risk, one long‐term bond (in addition to the money market acco
tion to the money market account) is sufficient to complete the market.
ong‐term bond. According to the Vasicek model, the volatility of the bond fund is given by
fficient to complete the market. All other long‐term bonds are redundant. In order to maxim
All other long-term bonds are redundant. In order to maximize tracta-
ability, we assume that
bility, we one zero‐coupon
assume bond fund
that one zero-coupon bondwith
fundconstant maturity
with constant t + K and price B
maturity
able. In practice, this would be a continuously rebalanced portfolio of the money market fund
t + K and price BK is available. In practice, this would be a continuously
ong‐term bond. According to the Vasicek model, the volatility of the bond fund is given by
rebalanced portfolio of the money market
�� fund
� � � and any long-term bond.
According to the Vasicek �� =model, the volatility. of the bond fund
��
is given by
��
�� = .
model implies that markets are dynamically complete �� and captures the time‐varying natur
cted returns and the negative correlation between the short rate and the bond and stock ret
This model implies that markets are dynamically complete and captures
the
is typically observed. time-varying nature of expected returns and the negative correlation
model implies between the shortare
that markets ratedynamically
and the bond and stock
complete returns
and that the
captures is typically
time‐varying natur
his setup, it is observed.
straightforward to compute the composition of the numeraire portfolio, becau
cted returns and the negative correlation between the short rate and the bond and stock ret
cides with the optimal portfolio of an investor with logarithmic utility. Such an investor has a my
In this setup, it is straightforward to compute the composition of the
is typically observed.
avior and optimally
numeraire chooses an because
portfolio, instantaneously
it coincidesmean‐variance
with the optimalefficient
portfolioportfolio.
of an Because
tilities (σ1it
is setup, investor with logarithmic
, σis 2 straightforward
and σK) and risk utility.
to premiums Such an
of the
compute the investor has
two risky of
composition a myopic
assets behavior
(θS and θportfolio,
the numeraire K) are constant,
becau
and optimally chooses an instantaneously mean-variance efficient portfolio.
eraire portfolio has constant weights. It is the portfolio with initial value H(0) = 1 and weights in
cides with the optimal portfolio of an investor with logarithmic utility. Such an investor has a my
Because the volatilities (σ1, σ2 and σK) and risk premiums (of the two risky
d and stock given by
vior and optimally
assets θS chooses
and θK) arean instantaneously
constant, the numeraire mean‐variance efficient weights.
portfolio has constant portfolio. Because
ilities (σ1, σ2It and σ ) and risk premiums of the two risky assets
is the Kportfolio with initial value H(0) = 1 and weights in the (θS bondθKand
and ) are constant,
eraire portfolio has constant weights. It is the portfolio with initial value H(0) = 1 and weights in
stock given by
d and stock given by � ��
ℎ� = , ℎ� = ,
��
the remainder being invested

� in the ��
riskless�money
�� market account.
�
ℎ� = , ℎ� = ,
��
emainder being invested in the riskless money market account.
Bajeux‐Besnainou and Portait (1997) survey the properties and potential use
portfolio. Being the optimal portfolio of a logarithmic investor, it is instantaneo
efficient. It is also identical to the growth‐optimal portfolio: not only does it maxim
at any horizon, but it also asymptotically dominates any other strategy, as the proba
As we pointed out in Section 2 above, the solution of all of the problems
under consideration involves attaining a terminal wealth equal to a power
of the time T-value of the numeraire portfolio. Denote by c the value of
thatnumeraire
The power (in the HARA/CRRA
portfolio makes case, the calculation
it possible needs the
to compute to beprices
done forof contingent c
c = 1/γ, and in the mean-variance case, c = −1). Taking advantage of the
probability changes. Since the prices of all assets discounted by the numeraire port
Gaussian nature of the model, BJP (2003) show that the terminal wealth
under the original, “historical” probability, prices can be
H(T)c is attained by a portfolio with a constant weight c in the expressed as a simple ex
numeraire
probability change. For example, the price at time 0 of a security with payoff X(T)
portfolio and (1 − c)σT−t/σK in the bond fund, where σT−t denotes the volatility
of a zero-coupon bond
Bajeux‐Besnainou maturing(1997)
and Portait at T. According
show that tothis
theresult
Vasicek model:even under inc
prevails
this case, securities that are not marketed may not have a unique price and E[X(T)/
that prevails if the economy admits a representative agent with logarithmic prefer
��

price is only one element � = ,
��of the set of viable, no‐arbitrage prices. More specific a
��
so that the weight in the bond fund is a deterministic function of time.

This result can be used to study the properties of optimal portfolios.
hat the weight in the bond fund is a deterministic function of time.
We survey the main results in the next sections, first in the HARA/CRRA
case and next in the mean-variance case.

result can be used to study the properties of optimal portfolios. We survey the main results in
4. Main Results: The CRRA/HARA Case
� ��
and the Asset Allocation Puzzle �� = � ��
sections, first in the HARA/CRRA case and next in the mean‐variance case.
� ,
��
Combining results on the general structure of the optimal terminal
wealth (3) and the strategy yielding terminal wealth Y(T)c provided in the
ain Results: The CRRA/HARA Case and the Asset Allocation Puzzle
last section, with c = 1/γ, we obtain the optimal strategy for a CRRA investor
(with Ŵ can
where = 0).be
It interpreted
is a dynamicas the minimum
strategy subsistence
with weight 1/γ in thelevel: because the mar
numeraire
portfolio, and weight (1 – 1/γ) σT−t/σK in the bond. The remainder of the
infinity as the wealth becomes close to Ŵ, the investor will pick an investment strate
portfolio is invested in the money market account.
bining results on the general structure of the optimal terminal wealth (3) and the strategy yie
cThe investor is effectively using his position in the constant maturity
(K) provided in the last section, with c = 1/γ, we obtain the optimal strategy for a C
minal wealth Y(T)
bond fund to replicate a zero-coupon bond with a maturity that coin-
stor (with Ŵ = 0). It is a dynamic strategy with weight 1/γ in the numeraire portfolio, and weight
cides with his investment horizon T. In a one-factor interest rate model
� ∗ ��
such as the one used here, all long-term =�
bonds�are �� , and a zero-
σT−t/σK in the bond. The remainder of the portfolio is invested in the money market account.
� redundant,
coupon bond of any maturity can be replicated using the constant maturity
bond fund. In particular, in our version of the Vasicek model, $1 invested
at time t in a zero maturing at T is equivalent to investing $σT−t/σK in
investor is effectively using his position in the constant maturity (K) bond fund to replicate a z
the bond fund and the remainder, $(1 − σT−t/σK), in the money market
pon bond with a maturity that coincides with his investment horizon T. In a one‐factor interest
account.
el such as the one used here, all long‐term bonds are redundant, and a zero‐coupon bond of
urity can be replicated using the constant maturity bond fund. In particular, in our version o
cek model, $1 invested at time t in a zero maturing at T is equivalent to investing $σT−t/σK in
d fund and the remainder, $(1 − σT−t/σK), in the money market account.
38 Finance Vol. 43 N° 1 2022
ffect, the optimal policy is a constant‐weight strategy with weights 1/γ in the numeraire portf
(1 − 1/γ) in the In
zero‐coupon bond policy
effect, the optimal maturing at T (which is strategy
is a constant-weight replicated
withusing
weightsthe
1/γconstant mat
d fund). Note in that constant portfolio,
the numeraire weights and
imply
(1 −the
1/γ)need
in the to continuously
zero-coupon bondrebalance
maturing the portfol
at T (which is replicated using the constant maturity bond fund). Note that
onse to market fluctuations. In terms of the available securities, the weights in the stock and b
d are: constant weights imply the need to continuously rebalance the portfolio
in response to market fluctuations. In terms of the available securities, the
weights in the stock and bond fund are:
�� = ��ℎ� ,

��
weight in the bond is time‐varying, but deterministic: as the remaining time to horizon diminis
�� = �� + ��ℎ� .
��
bond maturing at T that the investor needs, becomes more and more similar to the instantaneo
The weight in the bond is time-varying, but deterministic: as the
ess money market fund and, accordingly, the weight invested therein increases at the detrime
remaining time to horizon diminishes, the bond maturing at T that the
constant maturity bond.
investor needs, becomes more and more similar to the instantaneously
riskless money market fund and, accordingly, the weight invested therein
increases at the detriment of the constant maturity bond.
result makes it possible to compare the optimal policy with the popular portfolio advice. As poi
This result makes it possible to compare the optimal policy with the
in Canner, Mankiw
popularand Weil (1997),
portfolio advice. the typical advice
As pointed presents Mankiw
out in Canner, a puzzle. andStandard
Weil mean‐vari
(1997), considers
folio theory (which the typical advice
a one presents
period amodel
puzzle. with
Standard
buy mean-variance portfolio policies) im
and hold investment
theory (which considers a one period model with buy and hold investment
all investors should hold the same portfolio of risky assets. The only difference between
policies) implies that all investors should hold the same portfolio of risky
folios of investors with different levels of risk aversion should be how they split their we
assets. The only difference between the portfolios of investors with different
ween risky and riskless assets. A consequence of this is that the ratio between the weight investe
levels of risk aversion should be how they split their wealth between risky
ks and (long‐term) bonds
and riskless should
assets. be independent
A consequence of risk
of this is that aversion.
the ratio betweenBut thepopular
weight advice does
orm to this, with a stock to bond ratio that is typically decreasing in risk aversion. BJP (2001) s
invested in stocks and (long-term) bonds should be independent of risk
the model aversion.
considered Buthere
popularis advice does not
consistent conform
with to this, with
the popular a stock
advice. to bond
In this model, the opt
ratio
d/stock ratio equals that is typically decreasing in risk aversion. BJP (2001) show how the
model considered here is consistent with the popular advice. In this model,
the optimal bond/stock ratio equals
�� ℎ� 1 ��
= + �� 1� ,
�� ℎ� ℎ� ��
which is increasing in risk aversion, consistently with the popular advice.

In addition, the ratio decreases over time (for risk aversion γ > 1), which
h is increasing in risk aversion, consistently with the popular advice. In addition, the ratio decre
implies that the weight invested in cash increases over time. This is also
time (for risk aversion γ > 1), which implies that the weight invested in cash increases over t
consistent with the conventional wisdom.
is also consistent with the conventional wisdom.
These qualitative implications of the model are valid for any parameter
values. BJP (2001) also examine the model’s quantitative implications.
To achieve this, they assume the following parameter values: the constant
duration of the bond fund is K = 10 years. The current short rate is r0 =
4%. The parameters of the short rate process are ar = 18%, br = 4% and
σr = 2%. The risky premia of the risky assets are θS = 6% and θK = 1.5%.
The stock diffusion coefficients are σ1 = 19% and σ2 = 6%, implying that
the stock volatility is 20% and the correlation between stock returns and
changes in the short rate is -0.30.
Table 1 provides the asset allocation weights (in percentages), for two
different values of the time horizon (T = 1 year and T = 5 years) and three
different values of the relative risk aversion (γ = 2, 5 and 8).
Investor Cash weight Bond weight Stock weight Bond/stock ratio

T = 1 year
γ=8 55 28 17 1.60
γ=5 39 33 28 1.17
γ=2 -22 52 70 0.75
T = 5 years
γ=8 10 73 17 4.18
γ=5 -2 74 28 2.65
γ=2 -47 78 70 1.12
These weights conform to the qualitative features of the popular advice:

the bond-stock ratio increases in the risk aversion – which contradicts
standard one-period mean-variance portfolio theory – and the cash weight
decreases in the time horizon. Because the stock weight is unaffected by the
investment horizon, it is clear that the latter result is driven by changes in the
bond weight: as the investment horizon becomes nearer, the investor does
not modify his investment in the stock, but reduces his investment in long-
term bonds and invests more in the money market account. This is because
investors use the bond fund to replicate a zero-coupon that matches their
investment horizon. The shorter their horizon, the smaller the investment
in the bond that is required in order to do this. For comparison, Table 2
provides average values recommended by financial advisors and in the press
(average of weights recommended by Fidelity, Merrill Lynch, Jane Bryant
Quinn and the New York Times).
higher tends to one as th
The numeraire portfolio makes it possible to compute the p
The numeraire portfolio makes it possible to compute
probability changes. Since the prices of all assets discounted by
�� = ��
probability changes. Since the prices of all assets discoun
40
under the original, “historical” probability, prices can be
Finance Vol. 43 N° 1 2022
expr
The numeraire
under the original, “historical” probability, prices can b portfolio
probability change. For example, the price at time 0 of a secu
probability changes. Sinc
probability change. For example, the price at time 0 of
Bajeux‐Besnainou and Portait (1997) show that this result pre
Bajeux‐Besnainou
Bajeux‐Besnainou and Portait and (1997) under the original, “histo
Portait survey
(1997) show that this res
the properties an
this case, securities that are not marketed may not have a uniq
Investor Cash weight Bond weight Stock weight Bond/stock ratio
probability change. For e
portfolio. this case, securities that are not marketed may not have
Being the optimal portfolio of a logarithmic investor,
Conservative 35that prevails if the economy admits a representative agent wit
33.75 31.25 1.08
Bajeux‐Besnainou
that prevails if the economy admits a representative age
efficient. It is also identical to the growth‐optimal portfolio: not on and Po
Moderate price is only
11.25 one element
37.5 of the set of viable, no‐arbitrage pr
51.25 0.73
price is only one element this case, securities that a
of the set of viable, no‐arbitr
at any horizon, but it also asymptotically dominates any other strat
Aggressive 2.5made to determine the particular price that will prevail in equil
17.5 80 0.22
that prevails if the econo
made to determine the particular price that will prevail in
We find that the model’s
results (in Table 1) are not too different from one elemen
price is only
the popular advice, except in one significant respect. For investors with a
made to determine the p
low risk aversion, especially when the investment horizon is long, the cash
weight is negative:The
it isnumeraire
optimal to borrow at the riskless
makes it rate in order
possible to to
portfolio hold
compute the price
a leveraged position in
the risky assets. This is not present in the popular
probability changes. Since the prices of all assets discounted by th
advice. It is likely that the popular
advice implicitly assumes that leverage is
BJP (2003) consider the c
under the original, “historical” probability, prices can be expresse
not allowed. In addition, considering inflation risk (which is absent in our � ��
model) would likely probability change. For example, the price at time 0 of a security
increase the optimal weight in cash. Furthermore, ��
= BJP � � �
�� = � � ��
(2001) shows how Bajeux‐Besnainou
the model parameters and can
Portait (1997) show
be modified, that
in a way this isresult
that prevail
��
not unreasonable,this case, securities that are not marketed may not have a unique
in order to eliminate negative cash positions.

that prevails if the economy admits a representative agent with lo
BJP (2003) extends these results to the case of a HARA utility with a
minimum subsistence where Ŵ one element
level
price is only .can be interpreted
In that as (3)
the shows
minimum subsistence lev
case, of the set of viable, no‐arbitrage prices
equation that the
where to Ŵ can
plus be
the interpreted as
the
that minimum
optimal terminal made to determine the particular price that will prevail in equilibriu
wealth is equal terminal wealth would
infinity as the wealth becomes close to Ŵ, the investor will pick subsisten
be optimal for a CRRA investor. This can be attained by investing in a
infinity as the wealth becomes close to Ŵ, the investor w
the terminal wealth exceeds this level. In that case, the optimal buy
and hold combination funds: a zero-coupon bond paying off $ Ŵ can
of twothe terminal wealth exceeds this level. In that case, the o
where at be interpr
time T, and a strategy similar to the optimal CRRA strategy studied above.
infinity as the wealth bec
This result implies that the portfolio strategy is convex:the terminal wealth excee
the optimal
weight in the stock increases when the stock price increases � ∗ �� ,
(in a=fashion
�
similar to portfolio insurance).
This is an implication of the structure � ��∗
=�
of the � � ��
optimal wealth, which consists of a CRRA fund and a fund that replicates
the zero-coupon bond maturing at time T. The former has a constant weight � ��
�� = � �
invested in the stock, and the latter consists entirely of money market account
��
and constant maturity bond. When the stock does well, the weight in the
bond fund mechanically
diminishes (because it does not include the stock),
implying that the weight of the stock in the overall portfolio increases. This
result stands as long
where as γ Ŵ can
> 0. be interpreted as the minimum subsistence level:
infinity as the wealth becomes close to Ŵ, the investor will pick an
5. Main Results: the terminal wealth exceeds this level. In that case, the optimal ter
The Mean-Variance Case
We know from equation (7) that DMVE portfolios consist of a buy and
hold combination of a fund with a riskless payoff at time T, and a position in
a strategy with a payoff equal to 1/H(T). The amounts�
∗ ��
invested=in��these
� ��
two
��
,

funds depend on the level of risk chosen by the investor under consideration.
Of course, this is not an entirely new result: from standard mean-variance
portfolio theory, we know that the set of efficient portfolios can be generated
using two portfolios, a result known as two-fund separation. The innovation
in BP (1998) is that the two funds are allowed to be dynamically rebalanced.
The Vasicek model shows how a fund with a riskless payoff at time T can
be replicated using the constant maturity bond fund and the money market
account, with weights that are a deterministic function of time, σT−t/σK and
1 − (σT−t/σK), respectively. And BP’s work shows that a portfolio with payoff
1/H(T) can be replicated by a strategy with constant weights; the formulas
for these are a special case, c = −1, of the weights at the end of Section 2.
BP shows that the portfolio with payoff 1/H(T) is an inefficient minimum
variance portfolio: among all the portfolios with the same expected return,
it is the one with the lowest variance; however, there exist portfolios with
the same variance, but a higher expected return, making it inefficient.
Thus, as is known from classical portfolio theory, mean-variance efficient
portfolios can be constructed by short-selling the fund with payoff 1/H(T),
and investing the proceeds in the riskless bond fund.
In the mean-standard deviation space, all dynamically mean-variance
1
efficient portfolios are
� =located on �� −line.
+ a�straight 1, Using again the Gaussian
� �0�
nature of the model, BP are able to determine the equation of the efficient
�
frontier with dynamic trading, referred to as DEF:
the expected (gross) 1

and σ denote � return
= �� − 1, deviation of return of any efficien
+ �standard
and
�� 0�
o and:
where E and σ denote the expected (gross) return and standard deviation
of return of any efficient portfolio and:
where E and σ denote the expected (gross) return and standard deviation of return of any efficient
portfolio and: � � = �� + �� + � � �� + 2�� ,
1 2�1 − � �� 1 − � ��
�� = �1 − + �,
�� = �� +��
� � � 2�� ,
� + � �� + 2��
1 1 2�1�−�� 1 − � ��
�� −1
�� =
� �=� �1 −
�1 + � � +�, �,
� �� 2��
and BT(0) denotes the t = 0 price � �� − 1 bond paying-off $1 at T.

1 of a zero-coupon
�= �1 + �,
��
) denotes the t = 0 price of a zero‐coupon bond paying‐off $1 at T.

42 Finance Vol. 43 N° 1 2022
BP (1998) provides a comparison of the slope of the DEF with the

slope of the efficient frontier obtained without dynamic trading, i.e., the
slope obtained in standard, static mean-variance portfolio, referred to as the
static efficient frontier, or SEF. For parameter values similar to those above,
dynamic trading leads to a gain in the slope that varies between approximately
6% and 23% depending on the risk premiums that are assumed for the two
risky assets (bond and stock). The higher the risk premiums, the higher the
gain. Dynamic trading has much larger benefits for long-term investors,
because over long-time horizons asset prices experience large swings, and
the portfolio weights can deviate from their initial values in a dramatic way.
In the simpler setup of a constant riskless rate and risky assets whose price
follows a geometric Brownian motion (a case where the benefits of dynamic
trading are lower than with stochastic interest rates), BP (1998) shows that
the gain in slope from dynamic trading is multiplied by approximately five
as the time horizon increases from 1 to 5 years.
BP (1998) also examine the initial composition of the optimal DMVE
A feature of portfolios.
the optimal They
policy
arein qualitatively
BP (1998) that limits
similar toits
thepractical
CRRA applicability
case, with a is that the terminal
bond/
wealth may be negative in some states. Nguyen and Portait (2002) address this issue. Specifically, they
stock ratio that decreases as the portfolio risk and expected return increase,
add a solvency constraint,
consistently W(T)
with the≥ conventional
0, to the mean‐variance optimization
wisdom of portfolio problem
advice. (4)‐(6). In a general
This finding
context, the solution is given by
reinforces the conclusion that dynamic trading is key to understanding
real-life portfolio choices.
feature of the optimal policy in BP (1998) that limits its practical applicability is that the terminal
A
A feature of the optimal policy in BP (1998) that limits its practical
wealth may be negative in some states. Nguyen and Portait (2002) address this issue. Specifically, they
∗ ��
applicability is that the� terminal wealth ��
= �� may + ��be�negative
, in some states.
add a solvency constraint, W(T) ≥ 0, to the mean‐variance optimization problem (4)‐(6). In a general
Nguyen and Portait (2002) address this issue. Specifically, they add a solvency
context, the solution is given by
constraint, W(T) ≥ 0, to the mean-variance optimization problem (4)-(6).
where the values of the Lagrange multipliers ψ and φ are obtained by substituting the optimal wealth In a general context, the solution is given by
into the constraints (5) and (6).
� ∗ �� = �� + �� ,

where the values of the Lagrange multipliers ψ and φ are obtained by substi-
The optimal policy can be rewritten as follows:
tuting the optimal wealth into the constraints (5) and (6).
where the values of the Lagrange multipliers ψ and φ are obtained by substituting the optimal wealth
into the constraints (5) and (6).

� ∗ �� = �� + �� + max�−�� + ��, 0�.
The second term is the payoff of a put option where the underlying
asset is the unconstrained optimal wealth (ψH(T)−1 + φ) and the exercise
� ∗ �� = �� + �� + max�−�� + ��, 0�.

The second term is the payoff of a put option where the underlying asset is the unconstrained optimal
−1
wealth (ψH(T) + φ) and the exercise price is zero. Thus, the optimal policy with a solvency constraint
price is zero. Thus, the optimal policy with a solvency constraint can be
thought of as a combination of the unconstrained optimal DMVE policy
and a put option. Relative to the unconstrained case, the investment in the
DMVE portfolio must be scaled down in order for the investor to be able
to afford the put option.
In order to study the implications of this result on portfolio strategies,
Nguyen and Portait (2002) assume a continuous-time framework with a
constant interest rate and constant coefficients for the risky assets, implying
that their prices follow a Geometric Brownian motion. Then, the nume-
raire portfolio also follows a Geometric Brownian motion, so that the put
option can be valued using standard Black and Scholes technology, and the
replicating strategy can be computed explicitly. Nguyen and Portait (2002)
show that the presence of the solvency constraint has a profound impact on
the portfolio strategy, with a much reduced weight in risky assets for long
term investors. They also examine how portfolio weights evolve over the
investment horizon. On average, the optimal weight in stocks decreases over
time, consistent with conventional wisdom. But this is not true for every
path of the stock market: when it performs poorly at the beginning of the
investment period, it is optimal to increase the weight in stocks. This is a
consequence of the assumption of mean-variance preferences, which are
known to imply increasing relative risk aversion.
6. Conclusion
In this article, we have surveyed the contributions of Roland Portait to
the theory of dynamic portfolio choice. Employing a simple but powerful
continuous-time model that incorporates stochastic interest rates, we have
characterized the optimal policy under different assumptions on preferences
and shown, in particular, how the conventional wisdom of portfolio choice
can be supported by the theory, resolving the asset allocation puzzle of
Canner, Mankiw and Weil (1997). The optimal policies obtained when
dynamic trading is allowed differ from their buy and hold counterparts in
a profound way, and the potential improvement for investors is sizable.
The finding that optimal portfolio weights in risky assets are typically
decreasing over time, which is obtained both under expected utility and
mean-variance preferences, further highlights the relevance of dynamic
optimization models. Static, buy and hold policies imply the opposite:
44 Finance Vol. 43 N° 1 2022
because they have higher average returns, risky assets tend to make up a
larger and larger proportion of a portfolio over time, unless the portfolio
is rebalanced. Thus, the way buy and hold portfolios naturally evolve over
time contradicts both the conventional wisdom of portfolio choice and
the optimal policies that we have surveyed, demonstrating the practical
relevance of dynamic models.
References
Bajeux-Besnainou, I., J.V. Jordan and R. Portait, 2001, An Asset Allocation Puzzle:
Comment, American Economic Review, 91, 1170-1179.
Bajeux-Besnainou, I., J.V. Jordan and R. Portait, 2003, Dynamic Asset Allocation
for Stocks, Bonds, and Cash, Journal of Business, 76, 263-287.
Bajeux-Besnainou, I. and R. Portait, 1997, The Numeraire Portfolio: A New
Perspective on Financial Theory, European Journal of Finance, 3, 291-309.
Bajeux-Besnainou, I. and R. Portait, 1998, Dynamic Asset Allocation in a Mean-
Variance Framework, Management Science, 44, 79-95.
Canner, N., G. Mankiw and D. Weil, 1997, An Asset Allocation Puzzle, American
Economic Review, 87, 181-191.
Cox, J. and C.-F. Huang, 1989, Optimal Consumption and Portfolio Policies
when Asset Prices Follow a Diffusion Process, Journal of Economic Theory,
49, 33-83.
Long, J.B., 1990, The Numeraire Portfolio, Journal of Financial Economics, 26,
29-69.
Nguyen, P. and R. Portait, 2002, Dynamic Asset Allocation with Mean Variance
Preferences and a Solvency Constraint, Journal of Economic Dynamics and
Control, 26, 11-32.
Vasicek, O., 1977, An Equilibrium Characterization of the Term Structure, Journal
of Financial Economics, 5, 177-188.

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HONORING THE MEMORY OF PROFESSOR ROLAND PORTAIT

A collective work by Patrice Poncet, Patricia Charléty, Bernard Dumas, Isabelle

2022/1 Vol. 43 | pages 3 à 45

Distribution électronique Cairn.info pour Association Française de Finance.

Powered by TCPDF (www.tcpdf.org)

As a tribute to our colleague Roland Portait, Finance has decided to

I. Tribute to Roland Portait (1943-2021)

financial decisions of micro agents in a rigorous way, insisted on the role

This work may be broadly divided in four parts: portfolio insurance,

processes applied to the valuation of financial asset prices, as a chapter in

In a sequel to the BP (1998) paper, BP (2002a) analyzed dynamically

to their own commitment to their clients. The authors characterized the

Charlety-Lepers P. et R. Portait (1994). L’impact des stratégies d’assurance de

Portait R., T. Demians d’Archimbaud et H. Geman (1990). Une analyse générale

II. In gratitude to our professor, colleague,

blessed to work with Roland as a co-author as he invited me to collaborate

2. How much we owe to Roland Portait as students

3 ‘Obviously, the answer is…’.

Another major textbook of Roland is in corporate finance, Les Décisions

3. How much we owe to Roland Portait as colleagues,

(chaired professors of Economics and Finance in the Wharton school), Marti

4. An ever young and curious mind

III. Macroéconomie financière (1980)

by Patrice Poncet and Roland Portait,

Far from being just a textbook, Macroéconomie financière was in effect a

beyond the conditional expected values as has been demonstrated by Lucas

approach too cumbersome and has replaced it with a simpler framework, in

On every page of the PP book the spirit of inquiry is visible. While

IV. A Survey of Roland Portait’s Contributions

It is a great honor for us to share this survey of Roland Portait’s work on

yet includes securities with realistic characteristics and captures several

����������� � ��0�. (1) (1)

���� � ���� ��������

The value of the Lagrange multiplier y can be obtained by substituting

subject to ������������ � ��0�, (2) (2)

Bajeux-Besnainou and Portait (1997) survey the properties and potential

The numeraire portfolio makes it possible to compute the prices of contin-

where the values of the Lagrange multipliers ψ and φ are obtained by

36 Finance Vol. 43 N° 1 2022

the remainder being invested

38 Finance Vol. 43 N° 1 2022

which is increasing in risk aversion, consistently with the popular advice.

Investor Cash weight Bond weight Stock weight Bond/stock ratio

These weights conform to the qualitative features of the popular advice:

frontier with dynamic trading, referred to as DEF:

the expected (gross) 1

and BT(0) denotes the t = 0 price � ��� � − 1 bond paying-off $1 at T.

BP (1998) provides a comparison of the slope of the DEF with the

� ∗ ��� = �������� + �� + max�−�������� + ��, 0�.

� ∗ ��� = �������� + �� + max�−�������� + ��, 0�.

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Charlety-Lepers P. et R. Portait (1994). L’impact des stratégies d’assurance de

blessed to work with Roland as a co-author as he invited me to collaborate

�� 0�. (1) (1)

��

subject to �� 0�, (2) (2)

and BT(0) denotes the t = 0 price � �� − 1 bond paying-off $1 at T.

� ∗ �� = �� + �� + max�−�� + ��, 0�.

� ∗ �� = �� + �� + max�−�� + ��, 0�.